Deep Underground with Raul Groom

Wednesday, August 04, 2004

Well, I've been away for a while, largely because my company has foisted a new browser off on us and it doesn't work with blogspot, so I haven't been able to log in. It was a good time for a break, though, because I think I'm going to go in a different direction with the blog for a while. Rather than focusing on current events and general snarking (which I cover pretty well in my about-monthly DU column) this blog is going to tend more to the philosophical end of things, with an emphasis on political philosophy.

Now, if that sounds boring as shit, well, tough. It's my blog, it makes me no money, and I can do with it what I want. But to liven things up a bit, I'm going to try to engage some other bloggers in cross-blog debates.

Our first contestant is a friend of mine from back home who now lives in Georgia and operates a site called www.smelltheglory.com. Yes, that's right, "Smell the Glory." If you need an explanation, you would never understand.

When I told him of my idea for a Blog Debate Challenge, he immediately thought it sounded very exciting, which is a good example of why he is my friend - we are both losers. But never mind all that.

Our topic for the week is The Minimum Wage.

I'll post a link to Ethridge's response once he gets it up. The response, that is.
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The Federal Minimum Wage

Economically speaking, the minimum wage is a price floor on the cost of labor per hour. To most opponents of the minimum wage, this is the beginning and the end of the argument against it. There people have a point – a price floor that’s set above the going rate for a good or service (in this case, hourly wage labor) has the effect of creating an artificial surplus of that good or service. Since industrial capitalist economies suffer from a chronic labor surplus generally, it seems that setting a minimum wage in such an economy would be counterproductive.

The key word here, though, is seems. In fact, since the minimum wage was first introduced in the 1930’s, increases in the minimum wage have turned out not to correlate with rises in the unemployment rate. There is a huge amount of propaganda out there to the contrary (mostly appealing to “common sense” and “Economics 101”), but serious economists now accept that the federal minimum wage has little to no effect on the unemployment rate. Why is this?

Most obviously, the reason a price floor would not have the effect of creating a surplus is that the floor was set below the market price. For example, right now, if the U.S. government set a price floor of $10 on a barrel of oil, the floor would have no effect at all, because oil is never going to approach $10 a barrel.

But the reality is that a lot of people do make the minimum wage, and these people do obviously get a raise (or get fired) when the minimum wage is increased. So why doesn’t this price floor create a labor surplus?

The answer is pretty simple. The reason a minimum wage increase does not result in the mass firing of minimum wage workers is that the minimum wage is actually much less than the natural market price for labor. However, the inequality between the negotiating position of individual unskilled workers and that of the companies that employ them creates a situation in which the laborers are unable to negotiate a fair price for their services.

If there is a single principle of capitalism that is more effectively obscured than the principle of inequality of negotiating positions, it is so effectively obscured that I have never heard of it. Yet it is difficult to imagine a simpler principle to understand.

When one party in a negotiation cannot walk away from the negotiating table, he cannot hope to negotiate a fair deal. This is clearly the situation that prevails when a worker is negotiating for a wage when he has bills piling up and children to feed. Furthermore, even if a worker is not in such a dire situation, he can rest assured that the company with which he is negotiating knows that there is someone out there who is in such great need of a job that he will accept work for far less than the natural market price.

The core principles of market economics apply to parties in roughly equal negotiating positions. A company with a drinking water monopoly, for example, could charge an essentially infinite price for its goods, and people would be forced to pay it. The negotiating positions are not equal. While not quite as unequal as the previous example, the negotiating positions of a minimum wage worker and a large corporation (or even a small business) are so obviously disparate that it hardly bears discussing.

But the question will certainly be asked – shouldn’t the person who needs the job the worst get the job? Or, to put it in the converse, is it fair to keep the person who needs a job the worst out of work while someone else who needs the job less gets to work?

In the abstract, this question might be interesting. But it is only relevant if it actually corresponds to something that is happening in the real world. We must ask the question – “Is there a surplus of minimum-wage labor?”

Given the inequality of negotiating positions between an unskilled worker and his employer, it should come as absolutely no surprise that in fact there is no such surplus, and never has been. When companies can pay less than they would be willing to pay to hire a certain type of worker, they will continue to hire such workers until they cannot find any more of them.

We can now see why the net effect of the minimum wage on the labor surplus is none. Obviously, at some level, the minimum wage would have an effect on the market price of labor. If the minimum wage were set at the natural market price for unskilled labor, this would minimize poverty while maximizing employment. Thus the government should aggressively increase the minimum wage until the natural market price of labor is met.


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