Economy & Business

On Minimum Wage, a Flight from Reality

Demonstrators march past a McDonald’s restaurant during a protest calling for a $15-an-hour nationwide minimum wage in Chicago, Ill., in 2016. (Jim Young/Reuters)
The price of labor is an economic reality, and you cannot legislate away reality.

The endless debate over the minimum wage — the newly elected Democratic majority has put a hike to $15/hour at the top of its 2019 agenda — is a classic case of mistaking the map for the territory.

When we work, we do not trade our labor for money. We trade our labor for goods. Those can be physical goods such as Honda Civics and avocados or services such as air travel and health care. If we earn more than enough to achieve our desired consumption, then we may redirect some of our earnings into savings and investments, which are themselves ultimately realized in the future consumption of goods and services. Money is only an intermediary.

Properly understood, money is a record-keeping system. We sometimes call it a “medium of exchange,” but that’s just another way of saying the same thing. That record-keeping system is important, because it lowers transaction costs, which is to say, it makes it less costly for us to do the things we want to do.

For example, at the moment a Rolls-Royce Dawn is valued at about the same as ten Honda Civic Type Rs. The Honda Civic Type R is priced about the same as 17,500 good avocados. In principle, you should be able to drive down to your local Rolls-Royce dealership with a trailer-load of Honda Civics and trade ten of them for the Dawn. Likewise, in principle, you should be able to do the same with 175,000 avocados.

But we don’t price things in high-quality Japanese cars or large fatty berries from Persea americana. There’s a reason for that: While consumers in the aggregate may value the Rolls-Royce the same way they value ten Honda Civics or 175,000 avocados, the guy at the Rolls dealership doesn’t actually have much use for that many Hondas or avocados—even though he does want things that are valued the same way.

Money, as you no doubt were told at some point in middle school, was invented to address the high transaction costs of barter, including the barter of labor. There is not any reason that a fast-food fry cook could not enter into a contract in which he exchanges one year’s labor for a nicely kitted out Honda, but there are many other things he wants, too, and it would be impractical for him to enter into contracts with the providers of all those things — especially since he is going to want things he had never thought about wanting before he discovered them.

But, here’s the thing: People really do value Rolls-Royce automobiles much more highly than they do Hondas. The word “should” does not contribute anything of real substance to our discussion here — they just do. People value what they value and they prioritize what they prioritize, each according to his own needs, tastes, and interests. You can tell someone he should value that Rolls-Royce 20 times more than the Honda, or only five times more, or even that he should value it exactly the same as the Honda. But: He does not. Your should simply does not exist out there in the real world.

Congress could pass a law mandating that the price of a Civic is the same as the price of a Rolls-Royce. Question: Would you then willingly trade your Rolls-Royce for a Civic? Congress could pass a law mandating that a pair of rubber flip-flops has the same value as a pair of hand-made Lucchese boots, that a bag of those weird baked-kale chips they sell at Whole Foods is worth the same as a couple of grass-fed ribeye steaks, or that a skateboard must be priced the same as a Gulfstream G650. But would you willingly trade your boots for flip-flops, your steaks for kale chips, or your jet for a skateboard? Of course not.

There exists a vast hierarchy of values assigned to each and every good and service in the marketplace, and everybody gets to choose for himself what value he attaches to each product. He doesn’t get to choose for anybody else, but the instrument of voluntary exchange allows people to negotiate mutually agreeable trades — in a free market, a trade that is not mutually agreeable simply does not happen. Matching up the shifting and wildly different priorities of the world’s billions of buyers and sellers is mainly an information problem, and markets use the record-keeping system of money to solve that problem. This is an organic social order that has evolved over thousands of years. Nobody planned it out. Nobody passed a law bringing it into existence. It is.

People value labor in the same way they value goods and services. Wages are what we call the price of labor. We could pay people in avocados or automobiles, but it’s easier to pay them in money. But the use of money does not change how we value that labor vis-à-vis all the world’s products. There isn’t anything dishonorable or low about working in a fast-food restaurant or as a laborer on a construction site. All honest work is dignified. But that doesn’t mean we value it the same way. We don’t value the skills of the brain surgeon more than the skills of the 7-Eleven clerk because we think he’s a better person, or even because he spent so much time and effort pursuing the education and training that made him a brain surgeon. We value the work of the brain surgeon because when you need a brain surgeon, you really need a brain surgeon, and you can’t just pull some guy off the street and give him a couple of hours of training and expect him to be competent.

You can do that with a 7-Eleven clerk. I know. I was one. I remember the training.

Raising the minimum wage to $15 an hour is a way to try to force consumers of labor to value certain low-skill labor more highly than they do. But here’s the thing: They don’t. There isn’t any law that is going to make somebody voluntarily swap his Rolls-Royce for a stick of chewing gum, and there isn’t any law that is going to make any employer actually value a Burger King fry-guy (I’ve been one of those, too) in a way that is equal to how they value a newspaper copy-editor (yep) or a guy who hauls away debris from a construction site (ditto; pays better than I expected). Economic preferences are real, and you cannot legislate away reality.

What you can do is interfere with exchange. You can price out of the market entirely people whose labor is not actually worth $15 an hour to any employer, or you can force employers to try to offload those extra labor costs onto other employees, suppliers, or customers. You can encourage automation and other substitutions of capital for labor. And you can cause all sorts of chaos.

What you cannot do is cause people to actually value low-skilled labor as much as they do more skilled labor. Some things are beyond the reach of legislation.

We’ve had a minimum wage for a long time now, and some states have higher ones than the federal one. No one is ever going to set the minimum wage at the “right” level because there is no such thing. And all of our interfering with labor markets has not improved the standard of living of low-skilled workers relative to their more skilled colleagues.

We have improved the standard of living of low-skilled workers — and of low-income people generally — through the massive program of investment, innovation, and improvement that proceeds every day in every business in the world in spite of the politicians’ best efforts to co-opt it. That is why low-income people today — including minimum-wage workers — enjoy a real standard of living that is in many ways superior to the standard of living enjoyed by high-income people a generation ago. We have better cars, better clothes, better food, better houses with better things in them. Outside of a few government-dominated undertakings — education preeminent among them — almost everything that people need and desire has grown better and cheaper year after year. It isn’t magic that makes that happen. It isn’t politics, either.

If we are feeling generous, then, by all means, let’s be generous — with our own money. If we want low-skilled workers to have better lives in material terms — which is to say, if we think that their current levels of consumption are inadequate — then we can send them checks, or, if we don’t trust them to make their own decisions, send them vouchers for the things we think they should want, or even send them the things themselves, as we used to do with the old commodities program, all that government cheese. If we’re really trying to help low-income workers, then we should just go ahead and help them. There’s no shame in that. Recruiting employers into a political money-laundering scheme in order to keep the cost of welfare benefits off the books is cowardly and dishonest. It also doesn’t seem to really work in the long run — not the way we want it to.

Imagine that there were no such thing as money. Perhaps you are on a desert island where money simply does not exist. If you wanted to help improve the lives of workers who didn’t have very much, what would you do in that situation? You’d probably send them food and clothing and help to build houses for them. You wouldn’t worry about whether a coconut currently trades for one mango or three. In fact, if you tried to solve the problem of hungry workers by forcibly intervening into the barter arrangements for canoes and fishing poles, people would think you had lost your mind. If you insisted that calling one coconut “four quarter-coconuts” increased the food stores, they’d keep you away from pointy objects. But money is so damned useful that we’ve come to conflate the goods and services themselves with the record-keeping system.

In the real world, little green strips of cotton do not do anything useful. You can’t eat them or wear them to keep warm or sail to Japan on a raft of legal tender. The real world is made up of goods and services and labor, and the value that people find in such things is real, too. Really real. People actually do have their own priorities. You cannot change the real world by monkeying around with the record-keeping system. You cannot change the real value of labor by changing the minimum wage for the same reason that you cannot bring London closer to Paris by folding the map.

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