Wrong way with wages
August 6, 2013
Venture capitalist Nick Hanauer recently wrote an article for Bloomberg News suggesting an increase of the minimum wage to $15 an hour.
"The fundamental law is that if workers have no money, businesses have no customers," he said.
The inference was that the best way to stimulate the economy is to put more money in the hands of the workers.
Unfortunately, Hanauer failed to address a key aspect of that equation: Assuming the business owner doesn't lay anyone off, how much must prices rise to fund a $15 an hour minimum wage?
However successful Hanauer has been, it does not qualify him to create his own laws of economics.
In researching this commentary, I could find no other reference to his so-called "fundamental law of capitalism" other than Hanauer's opinion.
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Historically, arguments for big minimum-wage increases come from special interests such as labor unions and the well-meaning advocates of social justice.
But Hanauer is a venture capitalist, so what gives?
Hanauer cited studies conducted by the Economic Policy Institute indicating a $15 minimum wage would directly affect 51 million workers and indirectly benefit an additional 30 million.
That's 81 million people, or about 64 percent of the work force (and their families), who would then be more able to buy cars, clothing and food.
However, the problem with this and so many other economic studies is that they're predicated on assumptions and too often fail to take into account the most important factor in any economic model — human nature.
Whenever politicians (many of whom have no real-world business experience) talk about the minimum wage, I'm reminded of a story that occurred more than 100 years ago in upstate New York.
The story concerns a young country bumpkin with no experience or business skills to speak of who applied for a job as a retail sales clerk.
The store owner told the young man he would pay him what he was worth, which was considerably less than what the other sales clerks were earning.
But the young man wanted the job badly and began working long hours sweeping floors, dusting shelves and doing other work that would not be considered too challenging for someone so lacking in experience and sophistication.
Working for less than half what the other clerks were being paid, over time the young man accumulated the knowledge and experience that enabled him to go out into the world to open his own store.
In the decades that followed, he opened an entire chain of stores and became one of the wealthiest men of his time.
The young boy's name was F.W. Woolworth.
Had minimum wage laws been in effect at the time, Woolworth would never have been hired and thus likely would not have gained the knowledge and experience necessary to pioneer what were "arguably the most successful American and international five-and-dime stores, that set trends and created the modern retail model, which are followed to this day, worldwide," according to an entry in Wikipedia.
The foregoing epitomizes the downside of government-mandated minimum wages.
Many entry-level positions, in which young people can gain valuable knowledge experience, are simply eliminated when the government tells employers how much they must pay an employee regardless of that employee's true value to the business.
When someone's economic value is arbitrarily inflated, what the government is really doing is requiring the employer to engage in charity.
Charity is wonderful in its place, but America's economic engine does not operate on charity. This engine operates on predicates dictated by balance sheets and profit-and-loss statements.
Minimum wage laws are almost always discussed politically in terms of the benefits they supposedly confer on workers.
But truth be told, the real minimum wage, regardless of laws, is zero. That's what many workers receive in the wake of the creation or escalation of government-mandated minimum wage because they either lose their jobs or cannot find employers willing to hire them for more than their value to the business.
A common problem with the research on the employment effects of minimum wage laws is that the surveys include only employers whose businesses survived the minimum wage increase. The employers that were forced to close their doors due to government-mandated wage increases are left out of these surveys.
As the saying goes, "Dead men tell no tales."
The Economic Policy Institute is a highly regarded organization. Its projections are usually well thought out and underpinned. Nonetheless, they are projections, and projections by their very nature require assumptions. And we know what's said about assumptions.
History, however, is based upon what has already occurred, and history has shown repeatedly that unemployment rates tend to be chronically higher, the periods of unemployment longer and job creation far lower in nations where minimum wage laws and government policies require employers to provide increasing benefits to their employees.
Quote of the day: "It's hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong" — Thomas Sowell.
Butch Mazzuca, of Edwards, writes regularly for the Vail Daily. He can be reached at email@example.com.
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