[Endorsement status: some of my readers have pointed out that, mildly speaking, this post isn’t my best work. Upon reflection, I kinda have to agree. It’s not a crucial enough argument for me to bother rewriting the entire thing, and I’m leaving it up here for the entertainment value and the good discussion in the comments.]
There’s an old saying: “If you want to hear a dumb opinion, ask someone their thoughts on the minimum wage”. It’s the ultimate Dunning-Kruger topic – so complex that everyone thinks it’s simple, so hard that everyone has an easy answer.
In a series of three posts, I’m going to describe a few economic approaches to analyzing minimum wage laws. Broadly, economics is the study of how people get what they want by interacting with each other in non-violent ways.
If you want an apple and you pick it off a tree in the wild, that’s not economics because no one else is involved. If you want my apple and you stab me and take it, that’s not economics either. If you want me to give you my apple, we have entered the realm of economics.
Workers want a lot of things from employers. Mostly they want wages, but also a pleasant workplace, stability, good conditions, and respect. Employers want several things from workers too, mostly labor but some of the above as well. How they deal with each other is thus a matter of economics. Even if we’re interested in the moral and political implications (which I’ll also touch on), we have to first understand as well as we can the economics of employment and wages.
I won’t keep you in suspense – I think that minimum wage laws are a huge mistake, both economically and morally. I have 95% confidence that low-skilled workers would be much better off on all accounts if the minimum wage was repealed and replaced with any half-sensible form of redistribution. Redistribution that is even 3/4 sensible, e.g. negative income tax paid for by increased taxes on corporate profits, can make rich and poor Americans alike better off. If the minimum wage is repealed with no additional redistribution there would be a lot of short term pain, but I still think it’s more likely than not that workers would be better off in the long term.
With that said, my goal isn’t to write a polemic against the minimum wage, but an overview of increasingly sophisticated ways to think about it. I personally find that as economic thinking gets more sophisticated, it turns less in favor of the minimum wage, but you may not.
I think that there’s progress to be made in replacing stupid opinions with less-stupid ones, even if the policy prescription remains the same for the time being. So if my essay isn’t convincing, I hope that it’s at least educational.
The Economics Zero Approach
Unfortunately, our journey of increasing economic understanding has to start from an argument from which this understanding is entirely absent. This argument is so senseless than even debunking it isn’t going to be very educational. The only reason I have to address it is the frightening popularity this argument has gained recently with many of my friends and with a certain US senator.
The call is to force WalMart to raise its minimum wage to $15/hr, because some percentage of their employees use government assistance. Senator Sanders in particular claims that giving Medicaid and food stamps to Walmart employees amounts to welfare for the Walton family, and that the latter should pay their employees out of their own $100 billion in accumulated wealth.
This line of argument is entirely unconcerned with numbers, but the numbers are all right there on WalMart’s annual report.
WalMart makes $15B of profit on $480B of revenue, for a minuscule 3% profit margin. It has 2.3 million employees. Let’s assume that 2 million of those earn WalMart’s current $10/hr minimum or close to it. If their wage was raised to $15, that would mean a $5 per hour raise. With 40 work hours in a week that adds up to $200 per week, or $10,000 per year per employee, or $20 billion total for all of WalMart’s workers.
[Edit: thanks to some readers that pointed out that WalMart has 1.5 million employees in the US, and that many of them don’t work 40 hours a week. Still, even a payroll increase of $5B-$10B is not absorbable with such razor thin margins.]
$20B is more than WalMart’s entire net income. There is simply no way for a company with such tiny margins to increase its costs without transferring the entire increase to prices. Even if the Walton family wanted to pay the higher wage bill without raising prices, the entire $100 billion they accumulated in 55 years would run out in 5.
The other option is to raise prices for WalMart’s 230 million weekly customers. Most of those are much poorer than WalMart’s employees, like the 95 million adult Americans who are out of the labor force shop and earn no paycheck at all. Raising the wages of WalMart employees will result in a massive wealth transfer from lots of really poor Americans to the few not-so-poor Americans who are lucky to keep a job at WalMart.
Even at $10 an hour, WalMart gets more applications per open position that does Harvard.
There is going to be a lot of economic theory in parts 2 and 3 of my essay, but the simple fact that higher wages at WalMart would cause a lot of pain to a lot of poor people doesn’t depend on any of it. It’s a consequence of simple arithmetic that WalMart can’t pay anyone any wages if it goes out of business, and it can’t stay in business without raising prices to offset the rising wages.
Or, WalMart can just shutter all the stores that become unprofitable with low prices and high wages and fire all the associates those stores employed. I doubt that this is going to alleviate poverty either.
I’m pretty sure that it never crossed the mind of people attacking WalMart’s wages to do the math on WalMart’s income statement. I think it’s because the core of their argument is about ethics, and not about making workers richer. Unfortunately, the ethics of the argument are just as perverse as the numbers.
The Copenhagen interpretation of ethics is the view that interacting with a problem makes one culpable for it. This interpretation holds that ignoring an issue completely absolves one of sin, but fixing 90% of a tragedy leaves you guilty of the other 10%. It’s an ethics that is not concerned with alleviating suffering, it is only concerned with blame and scapegoating. And as the author who coined the phrase notes, it’s a very popular moral position.
WalMart is a very convenient scapegoat for American poverty because WalMart does a lot for poor Americans: it pays them tens of billions each year in salaries, and it saves them tens of billions each year in the prices they must pay for necessities.
In contrast, a company like Apple doesn’t employ any poor Americans and doesn’t make things cheap for poor Americans. It has net profit margins in excess of 20% (to WalMart’s 3%), trillions of profits parked abroad, and $256 billion in cash.
There are three reasons why Bernie and some front row kids want to hold WalMart and McDonald’s accountable for American poverty, but not so much Apple:
- Apple stays away from poor people, so it can’t be blamed for their condition.
- The people making this argument usually have iPhones and don’t eat at McDonald’s or shop at WalMart. I suspect that many of them look down in disgust on the very act of eating or shopping there, and they want everyone else to agree with them.
- Unlike McDonald’s and WalMart, Apple is a world class expert at avoiding paying taxes. You couldn’t get them to help poor people even if you wanted to.
[Edit: Bernie does have some harsh words for Apple as well. I think that his suggestion for Apple to move manufacturing to the US is as innumerate as his attacks on WalMart, but he certainly sticks to his principles.]
I want to reiterate that “welfare to WalMart” is a weak man, the stupidest position on an issue that is still held by a significant group of people. Deflating it is not a strong argument against minimum wage laws in general, that’s all coming up in the next two posts.
In Part 2 we’ll see what the much maligned “Econ 101” model really teaches. In Part 3 we’ll examine the role that wages play as a medium of information and societal organization, aside from their function as a mere contract between employer and employee.