Karl Marx must be smiling.
It’s capital vs. labor all over again. Income inequality is on the tip of every pundit and politician’s tongue. Thomas Piketty’s bestselling nonfiction tome, Capital in the Twenty-First Century, lends credibility to the Marxian notion that labor is doomed to a perpetually shrinking share of wealth.
“Capital is dead labor,” wrote Marx, ”which, vampire-like, lives only by sucking living labor, and lives the more, the more labor it sucks.”
In other words, labor makes machines that replace labor, leading to something else Marx wrote: “The production of too many useful things results in too many useless people.”
But free markets aren’t the culprit for capital’s advantage over labor in this epic Marxian contest. Government force is.
President Obama signed an executive order forcing all government contractors to pay at least $10.10 an hour. Seven states passed legislation this year to raise the minimum wage, with Connecticut, Maryland, Hawaii, and Vermont increasing the minimum to at least $10.10 an hour. Minnesota, West Virginia, and Delaware passed smaller increases.
Localities are following suit. The city of Seattle has approved a law to increase its minimum wage over the next three to five years (depending on employer size) to $15 per hour, with further increases indexed to inflation.
San Francisco, Santa Fe, San Jose, and Washington have voted to increase the minimum wage above the proposed $10.10 federal level. New York, San Diego, and Portland, Maine, among others, are also considering increases.
Higher Wages. Now What?
So what happens when the government forces employers to pay higher wages? Is it like what Alan Pyke wrote for Think Progress? “There are 102,000 workers in Seattle currently earning less than $15 an hour. Raising those people’s wages will put about half a billion extra dollars of spending money into Seattle workers’ pockets.”
Mr. Pyke must believe that money magically appears when wages are increased (by force). In the case of Seattle, half a billion dollars will appear from nothingness. A true free lunch.
In the real world, thin profit margins, compressed by competition, don’t allow for excess dollars to pay staff with. Businesses are already paying all they can for unskilled labor. Sure, McDonald’s Corporation makes billions. But employees are paid by local franchisees who—in my experience of having financed the real estate for a few Mickey D’s—have minuscule margins and in some cases don’t make money at all.
When government forces employers to pay workers more than they produce, businesses respond by replacing labor with capital. Some of us remember teenagers filling our gas tanks, washing our windows, and checking our oil when we pulled into a gas station. They used to be called service stations for that very reason.
Likewise, no one scanned their own groceries in the old days. In fact, someone would carry your groceries to your car!
Some chain sit-down restaurants are now allowing customers to order from electronic tablets at their table, to cut down on wait staff. By the way, do you think fast-food joints give us unfettered access to fill and refill our own drinks out of the kindness of their hearts? No, it’s that we can’t possibly drink enough soda to justify adding staff to fill soda cups at government-mandated levels.
If those fast-food burger flippers who picketed on May 15, seeking $15 an hour, don’t think they can be replaced, they should look into Momentum Machines, a Bay area robotics company. It claims, “Our alpha machine frees up all of the hamburger line cooks in a restaurant.”
Business Responds to Incentives
While normally the GOP is more sensible on this issue, Mitt Romney and Rick Santorum are prominent Republicans who support raising the minimum wage.
Labor costs are what has made the current recovery seem like a lingering depression. There are 3.5 million Americans who have been out of work 27 or more weeks, and the labor participation rate is at a decades-low 62.8%. In April, 7.5 million people who would like to work full time only had part-time jobs. Youth unemployment is nearly 20%.
The simple fact is that since the financial meltdown of 2008, companies are getting more value from capital than labor. “Workers are getting more expensive while equipment is getting cheaper,” Catherine Rampell wrote in the New York Times in 2011, “and the combination is encouraging companies to spend on machines rather than people.”
Using Commerce Department figures, Rampell estimated that in the first two years of the recovery, “businesses’ spending on employees has grown 2 percent as equipment and software spending has swelled 26 percent.”
“Firms are just responding to incentives,” said Dean Maki, chief United States economist at Barclays Capital. “And capital has gotten much cheaper relative to labor.”
Rampell pointed out that employment costs are being driven by increases in the cost of healthcare benefits. However, salary and benefits are just the beginning of labor costs. Companies pay dearly to sort out applicants, administer drug tests, and train new hires. And because of federal mandates, defending against wrongful termination lawsuits can cost millions.
“You don’t have to train machines,” Dan Mishek told the Times. “Everything should be as automated as it can be. We just can’t afford to compete with countries like China on labor costs, especially when workers are getting even more expensive.”
Machines don’t charge time and a half to work more than 40 hours a week. They don’t file unfair labor practice charges. Flip a switch and machines start and stop. No hiring or firing hassles. No health insurance needed. And the tax advantages are tremendous.
Boobus Americanus Wants to Give Everyone a Raise
Mob rule succeeded this week in Switzerland, with Swiss voters rejecting a minimum wage increase to $24.65, which would have made it the highest in the world. Unfortunately, Boobus americanus can’t connect the economic dots. US voters have overwhelmingly voted “yes” to raise the minimum wage at most opportunities. 71% of Americans polled by Gallup favor boosting the federal mandate.
The average American doesn’t understand simple economics. The National Council on Economic Education (NCEE) recently administered a short test to determine the average person’s economic knowledge, and the results were dismal. 42% of adults received a D or worse, and students did even worse, with 74% earning a D or an F. “Most adults and students have not mastered basic economic concepts,” says the NCEE.
These are the people voting for or urging their congressmen to vote for a higher minimum wage.
Before this issue was put to a popular vote, we were best off when Congress did nothing—and, in fact, DC’s inaction has slowed the minimum wage’s damage. Adjusting for inflation, Bloomberg reports, “The federal minimum wage dropped 20 percent from 1967 to 2010, even as the nominal figure climbed to $7.25 an hour from $1.40, a 418 percent gain.”
Now that the politics of minimum wage is local, voters can give everyone a raise. Maybe next we’ll put profit margins to a vote or cast ballots on executive pay.
Karl Marx may have been put in the ground in 1883, but he is far from dead. Because of the minimum wage, we have more and more useful things… and a growing army of people rendered useless.