Jun 4, 2014

Seattle Raise Minimum Wage to $15; Plutocrats Pull Their Hair Out That Consumers Will Have More Purchasing Power In Northwest Washington State

Seattle becomes the nation's leader in minimum wage Monday when they set the minimum wage to $15 (incrementally increased over next three years) nearly doubling the the Federal minimum wage and increasing the state minimum of $9.36, which is a 60% increase for the lowest paid workers. Small business employers such as Subway franchisee David Jones complain that he would have increase prices of his sandwiches by a dollar, nearly a 20% price increase; the implication being that his workers getting a 60% increase will require him to raise prices 20% to maintain his profit margin. Seattle's Clarion hotel claims that this will ensure rates will increase 10% to avoid large number of layoffs but instead only minor layoffs will occur; the implication being that they would have immediately hire far more than they actually need if they could pay the employees wages below what could sustain a subsistence living standard. The criticism of pushing local minimum wage has largely been based upon harming employment levels, but that ignores all economic analysis since Card & Kruger that in 1992 overturned the conventional wisdom that mandatory increase in labor costs would have a negative effect and shed jobs due to the increase of costs. Why that conventional wisdom seems intuitive, but does not bare itself out in reality, is that it assumes the perspective of the employer as the central decision maker in a local economy when in reality the aggregate of the consumers/employees has a larger effect on demand than the parochial concerns of the overly vaunted entrepreneur.

Even the uber-individualists of Reason.com, fail to include the employee's individual choice to demand higher wages as a liberty that should be respected. Only those that have already shown themselves to be the select elected, as in the theological Calvinist use of the term, can have their liberty defended by the libertarians while those not elected by not being graced by the invisible hand of the market should suffer with their station in life without complaint nor question. The employer can't bear to see a top marginal tax rate anywhere near the Laffer Curve, but the lowly minimum wage worker should not demand his/her fair cut for being industrious through his/her labor? That paradox that those who already have money beyond what they could reasonably spend in a lifetime would somehow have no further incentive if they were to minimize even an iota of luxurious living, but those that are barely getting by can have no financial cushion or they would no longer be incentivized to work (ignoring the incentive of continuation of said employment slightly above a subsistence wage).

Here is a hypothetical to exemplify this economic argument: if we were to have three individuals with different incomes a hedge fund manager with income of $100 million per annum, a insurance claims adjuster earning $50,000 per annum and a fast food worker getting paid $20,000 per annum (assuming Washington state minimum wage of $9.36/hour 40 hours a week, 52 weeks allowing for $600 worth of overtime pay). If we then were to increase the income of all our hypothetical earners by 60% of their income, would their economic activity differ and would that economic activity be beneficial to the rest of the economy? The minimum wage worker going from $20,000 to $32,000 can now put away savings for the inevitable rainy day AND viably climb into the middle-class becoming a more active consumer purchasing more products and services including local businesses such as restaurants. The insurance claims adjuster going from $50,000 to $80,000 can now purchase a newer car from the local dealer more often, go on family vacation (though economic benefits are transferred to wherever they travel, it would be reciprocal were the increase be nationally implemented rather than locally), and the additional funds would also allow the employee to be a little more risk-tolerant and possibly begin to invest along with a slight increase to his/her savings for retirement. Then we have the hedge fund manager earning a $100 million a year, having nearly unlimited purchasing power so increasing income would have no noticeable effect on personal consumer choices, leaving the only effect to what investment the multi-millionaire makes. If the hedge fund manager decided to start a labor intensive enterprise that required (at least down the road after it grew) a large number of employees that would beneficial to the greater part of the economy, but the return-on-investments (ROI) on such ventures are notoriously low which is why the financial industry has been growing as regulations and taxes on investments have evaporated over the last 30 years ensuring the high ROI with the least depency on labor. With the hypothetical income increases for anyone that are already keenly aware of their own economic limitations, any increase will almost entirely go to more consumption creating a demand in the consumer market while having a multiplier effect across the masses whose financial status has improved; conversely those that have nearly limitless purchasing power will not change their economic activity in any way that will increase demand in the economy and very likely would not increase employment in any way.

To argue that if the employer was free to hire the lowest possible wages while also free to set the highest possible prices to attain the most profit is not to the betterment of even those employers in the long term, as the employees getting squeezed on both ends will be resentful of those financially comfortable while they struggle. The counter argument would be that the masses of consumers given a greater purchasing power will cause more money chasing the same amount of product and service, though inflationary, benefits all working members of the economy and encourages consumption while rewarding income from work over passive income from investments which in the near term is the optimum scenario for our economy.

Those that despise the minimum wage has little to do benefitting the many, rather it has to do with that it doesn't exclusively benefit the few preordained economic victors. This can be seen in the plutocratic perspective that cheer for the immediate benefits of tax cuts for the wealthy, and their finger wagging towards immediately benefitting the lowest paid employees. Representative democracy exerting the will of the vast majority, those that are (or have in the recent past) getting paid at or near the minimum wage are seen as far too selfish which is the exclusive domain of those that have become accustomed to economic and political domination that claim their own selfish is a virtue and a vice for everyone else. Thanks alot Dagny Taggert!