Adumbration

Last summer I wrote briefly on the minimum wage in the context of my critique of a few of the candidates for Mayor of Seattle in the 2013 local election season.  The minimum wage continues to make the national news (such as this Planet Money podcast, and as the UPI reports here), and appears recently in The Seattle Times report by Jim Brunner ("Seattle 1-percenter a leader in push for $15 minimum wage", 2/15/2014). 

Brunner's report focuses on the person of Nick Hanauer, someone who managed to take earnings from his family business and make a few bucks through shrewd investments in Amazon and other companies.  With a lot of money and some time to spare, Hanauer has engaged in politics, writing and public speaking in favor of increasing the minimum wage.  I am taking this opportunity to raise some questions about the few points Hanauer makes surrounding the economics of such a change.

To begin with is this remark from the story:

Hanauer: “Prosperity isn’t something that squirts out of rich people.” It’s a result of policies that boost the wages of average workers.

The wage level is a very limited perspective on the nature of prosperity, and simply wrong to the extent that such a statement ignores purchasing power of those wages.  Prosperity is measured in terms of value of those wages as compared to real goods and services actually available for consumption.  We could have extremely high dollar wages, but our level of prosperity reduces to the extent that the value of the dollar falls in respect to our consumption demands. Prosperity is not wages - in our search for goods and services to satisfy our individual wants and desires, we are made better off to obtain more with less, to get more value for our dollars.  Where public policy is concerned, the advancement of prosperity should be concerned with removing obstacles to production. 

Hanauer made his name in the family pillow business before striking it rich as an early investor in Amazon. Now more interested in public policy than making money, he spends much of his time researching, writing and talking about income inequality. And his ideas have penetrated deep into Democratic politics.  “This is my world, I know a lot of these folks,” Hanauer said in an appearance on MSNBC last week. “These are borderline sociopathic people, and they don’t care about other people and they have no empathy.”

I don't know the people he is referring to , but hope Hanauer does not extend that uncharitable characterization to everyone who disagrees with him.  Too bad that the minimum wage policy that he promotes condemns the least well off segment of the population to permanent unemployment.

The idea even horrifies the CEO of Hanauer’s family pillow business.  “If someone were to force me to move the base wage in our manufacturing organizations to $15 an hour, we will be out of business in six months. Period,” said Joe Crawford, CEO of Seattle-based Pacific Coast Feather. ... Critics of raising the minimum wage — even his own CEO — fail to see the big picture, Hanauer says. If all workers receive higher wages, they’ll have more money to spend — and they’d spend some of it on pillows. A federal $15-an-hour minimum wage would lead to $450 billion in additional consumer spending a year, he estimates.

Hanauer is guilty here of the broken window fallacy - the idea that the community is better off when property is destroyed because it triggers a series of productive activities to restore the damage, which fails to recognize the alternative efforts which would have been performed in the absence of the original loss.  His statement also reveals that even reasonably smart people can fail to appreciate the unseen behaviors of their neighbors and fellow citizens. 

An increase in production costs results when the state imposes a minimum wage.  That increase is seen by consumers, some of whom will hold back from acquiring the more expensive good; those people are less well off, because their preferences are not being satisfied as effectively.  Those who continue to purchase at the now-higher price level thereby have less money remaining to spend on other things that they also desire.  Both conditions lead to reduction in demand, less production and correspondingly a less well off community.   

The low wage workers, people who are nominally targeted to an improved state, are also made worse off by the higher prices because they have less disposable income.  A defining feature of the industrial revolution, which continues to this day, is the notion of mass production - production for the masses.  Textile mills in the 19th Century weren't providing lace and silks for the landed gentry, they were making inexpensive fabrics available for putting clothes on the backs of everyone.  The mass of production is what makes goods inexpensive and broadly available to all segments of the population, which effect has been to raise the standard of living of even the poorest of us to levels never dreamed of in generations past.   Making increasingly efficient use of all the factors of production - capital, land, and labor - in all areas of our society, is the cause behind that advancing living standard.

Consumers in all economic classes are not the only people who are hurt by such policy - the load bears directly and heavily on those people who's knowledge, skills, and abilities and not sufficient to trade their potential contribution to the goods and services that consumers find of value at the prices offered.  Those people lose their jobs, or are not offered any work in the first place, and are condemned to poverty or to living on the dole, when at a lower wage they could be making a valuable contribution.

When pressed, Hanauer acknowledges that quickly raising the minimum wage that high could be problematic for some companies. That’s why the task force he’s part of is considering phasing in the wage in Seattle and adding exemptions for small businesses.  “Do we want to live in a society where people work full time and still have to get government assistance and go on food stamps? Do we want to live in a society that is economically optimized for places like McDonald’s and Wal-Mart?” Hanauer said.  Forcing higher wages might harm such companies, he said. “But I would respectfully suggest that if you have a business model that can’t survive without paying people poverty wages, maybe you should go out of business.”  Besides, Hanauer noted that taxpayers wind up subsidizing low-wage workers who qualify for food stamps and other government aid.

Phasing in the minimum wage is a convenient approach to hide the job losses that ensue from increasing the wage.  Businesses will take time to adapt to the new conditions, but they will find lower priced alternatives or reduce production to a level sustainable at a higher price point, and hope to retain sufficient customers to remain in business.  They will reduce employment, or employ greater automation to replace the services formerly provided by those low skilled workers.  The phase in time just gives those businesses time to adjust.

The small business exemption is just another way to keep the little guy small and out of the hair of larger companies, as growing beyond the threshold introduces penalties that larger companies may be more able to tolerate.  It also reveals a cynical perspective on the whole issue, because if the motivation for raising the minimum wage is some perspective on "fairness", it suddenly becomes less unfair for small business owners to pay lower wages.   But there is no economic rule that proclaims only small businesses are operating on thin margins, for whom even small cost increases in critical factors of production can mean the difference between profit and loss, success and failure, a thriving business or a closed up shop window. 

The remark to "go out of business" casts him in a self-righteous but cavalier light;  evidently, Nick Hanauer doesn't care that the alternative to working at minimum wage is no work at all, no production for the benefit of the community, and reduced living standards for everyone.

Too bad Hanauer doesn't take his vast wealth and ability as "one of the world’s best strategists" to think through a few more of the downstream implications of the minimum wage.  Instead it seems like he has a vision, and the world will just have to conform.