Very good column about wages and society’s economic wellbeing that my wife Lynn found in The Guardian (http://www.theguardian.com/commentisfree/2013/nov/29/walmart-downton-abbey-worker-inequality?INTCMP=ILCNETTXT3487).
Prompts me to put forward for consideration an economic argument that I’m not sure I’ve seen anywhere but probably just don’t remember seeing:
Should the minimum wage be raised to something like a “living wage”?
One argument is that raising the wage will just increase unemployment. It’s not clear that this claim is true unless one accepts the labor market model that assumes something approaching perfect competition, which on the face of it seems inapplicable to the labor market.
But another argument is that employers simply can’t afford to pay the higher wages. This is the argument I want to consider.
Clearly the neighborhood pizza shop can’t afford to pay higher wages since they would then be undercut by those that continue to pay the lower wages.
But if the largest private employer in the US, Walmart, with about 1.3 million employees paid more and McD (reportedly 1.5 million employees) paid more, would the Henry Ford effect occur?
Consider next leveling the playing field by mandating that everyone pay a living wage. What would happen then?
The (perhaps not original) idea that occurred to me is this: Companies in general only stay in business if they can pay the cost of their inputs. This seems unproblemmatic and clear for inputs like land, heat, electricity, raw material, etc. Why does it not apply, then, to labor inputs?
Right now the “cost of labor” is the minimum that a firm has to pay to hire someone. But why shouldn’t the cost of labor be set by society as equal to a living wage? If a firm can’t afford to pay that input cost as well as all its other input costs, then common sense economics would suggest that it should not be in business, any more than if it can’t afford to pay the heating bill or the cost of steel. Or, if there’s good social reason for that good or service to be produced, then that industry should become a not-for-profit rather than a non-profit.
(For what it’s worth, economic theory does say that this would tend to drive all industries somewhat more in the direction of capital-intensive or land-intensive production. But I would guess that the improved economic conditions resulting from the higher wages would offset this effect because of the resulting economic growth.)
(This benefit would combine with the benefit of increased labor mobility resulting from health care reform–workers no longer tied to their jobs to retain health insurance.)
What think ye?