Reality can be so annoying at times, as any number of social reformers have found out over the years. People should work harder and better in an equitable and equal society, but that’s not what the Soviets found out. Of course the foreigners would prefer to be ruled by us enlightened types, but the break up of the British Empire didn’t seem to show that – especially in 1776. And, sad as it is to say, minimum wages don’t mean that the capitalist exploiters lose profit to increase the incomes of the workers.
Sure, we’d all like to see low-end incomes rise – this is the very point of our having an economy at all, to improve the life of the average Joe and Jane. The question is, how? We can indeed tell everyone that they cannot sell their labor for less than some magic price. What happens then? More importantly, who now pays these higher wages?
We theoretically have three different groups. It could be that the workers pay. Those who keep their jobs get more, those who get fired or laid off lose, their loss meaning that they’re the people who pay. Certainly, we see some evidence of this at high minimum wages.
It could be the employers who pay – those capitalist pigdogs just get to roll in less profit in their basement strongrooms and wouldn’t we all weep bitter tears at that? We don’t in fact see any evidence of this being true.
The third group is us consumers. If prices rise to cover the higher wages then it’s us paying those higher wages. A new paper tells us that this is indeed what happens. “Our results suggest that consumers rather than firms bear the cost of minimum wage increases in the grocery sector “
Oh, right. The full paper is here. “We find that a 10% minimum wage hike translates into a 0.2% increase in grocery prices. This magnitude is consistent with a full pass-through of cost increases into consumer prices.” That is, all of the cost of the higher minimum wage is paid by us consumers out here.
[Also read: Sanders to introduce bill to force Walmart to pay $15 minimum wage]
This has a distinct importance. The argument of horrible classical liberals like me is that sure, we want the poor to be better off. And if people don’t have as much money as we think they should then we should take some of ours and give it to them, even if that’s through the tax system. The counterargument from the progressive liberals is that we don’t want to have to pay this, we want them, over there, the capitalists, to pay the higher wages. Therefore we should have a higher minimum wage.
But if it’s us consumers that pay the higher minimum wage, then the progressives’ argument doesn’t work, does it? We pay either way. Which means that we should in fact do it clearly and obviously. For that’s how we find out whether people really mean it when they say it’s worth doing. Only if you’re offering up your wallet to pay for it can we say that you really do believe that the plan is worth it. So, that’s how we should do it of course, not disguise the costs by claiming erroneously that someone else has to pay for our desires.
Plus, it’s always more efficient to subsidize directly than it is to mess with market prices.
So, we consumers pay for the minimum wage increases. Let’s cut out the middlemen and the pretense and insist instead that if we want the incomes of the poor to be higher then we’ve got to pay the taxes to distribute wealth to the poor.
That way we’ll find out, pretty quickly given the likely vociferous response, quite how much those low incomes need to rise to meet our expectations. I suspect not quite as much as the Fight for $15 would have us believe.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
