Forcing livable wages on businesses isn’t feasible

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Keeping on my recent trend of discussing employer-employee relationships and wages, I want to quickly touch on the idea of a “livable wage.”  Much like the myth that is wage slavery, the idea of a livable wage has snuck its way into mainstream discussions and is accepted by many as problem of society.

The problem I see with people who push for livable wages is that they don’t seem to understand the basic economic principles behind why a wage is agreed upon.  An hourly wage will be calculated with an equation that basically looks something like this:

Hourly Wage = N x (SP – MC – OC – CP)

where:

N = the number of units you can produce in an hour
SP = the selling price that the business can sell the product
MC = the cost of the materials and resources needed to produce the product
OC = the overhead costs needed to produce the product; this could include taxes and other costs incurred due to government and/or accreditation services, money needed to pay for non-productive positions, etc.
CP = the cut of the money that the company will take to earn profits, invest, etc.

There are other things that go into paying workers, but this depicts the general principle and for the sake of brevity, this is what we’ll go by.

In order to justify your position in the first place, the selling price has to be more than the cost of materials, overhead, and cut that the company takes.  As you become better at your job and can produce your goods more quickly, your wage will rise.  The increase in pay is what is supposed to incentivize you to be a more productive worker.

Let’s say that the selling price of a product is $10.  All of the other costs add up to $7.  This means that in our simplified model, you will be paid $3 for each unit that you produce.  If you’re capable of producing 4 in an hour, you will earn a wage of $12/hour.  If you are to earn benefits, this will be your overall cost to the company, so the actual pay in your paycheck since an employee’s overall cost is not the same as the employee pay.  As an aside, if the other costs go down, the company will likely drop the price to better compete in the market.  Depending on how much they think they can get you to do better, you wage may go up.  But overall, the company will be trying to maximize their profits while maintaining the lowest price they can and the highest production from their workers.

So what are you doing when you take a job?  You’re selling your labor.  If you want to sell your labor for $10 an hour, but are only capable of producing something that sells for $8 an hour, you won’t get hired.  You’ll have to lower your asking price.

It’s not that the business doesn’t want to pay you a lot of money.  The issue is that the business is going to do what it needs to do not only survive, but grow.  It’s nothing personal.

Then what happens when people petition the state to create laws about pay, like minimum wage laws?  If the minimum wage is $7 an hour and you’re only capable of producing $6 an hour, instead of getting paid $4 an hour, you won’t even get the job.  Or the company will have to lay off other workers or lower their pay in order to make room for you.

Other methods include raising prices, which will cause less people to purchase your company’s goods or services.  And if that enough people stop patronizing the business, your job might be in jeopardy.  Or instead of raising prices, they’ll look for other ways to keep the price of production down.  They might use cheaper materials to keep the price the same, but that lowers quality and impacts consumer satisfaction, again eventually hurting the business ability to employ workers.

The demand for these livable wages might sound nice, but it isn’t exactly economically feasible.  Companies will tend to pay you what they deem you to be worth production-wise.  It might not be too feasible to live off a $5 an hour job, but when that’s all you are capable of earning, the alternative of having no job at all isn’t as bad.

Like the misguided idea of wage slavery, who are we to decide if a mutually agreed upon sale of labor is just or not.  If the selling party doesn’t think the wages are high enough, they wouldn’t have agreed under their own free will to the terms.  And if we do force minimum wages onto employers, many potential low-skilled workers can’t justify the higher paycheck and won’t even be able to start low in hopes of working their way up.

Many people have good intentions with this and many people will criticize business owners for being out to make money.  But for what other reason would anyone go into business?  I think we all want to see everyone succeed in life and live well.  So knowing that using the state to force wage standards on businesses will result in layoffs and discourage hiring, what is your solution?

For a great video on this topic (and more specifically minimum wage laws), I highly suggest this video.

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[…] common argument is that it removes the bottom rungs of the economic ladder. Those who are unable to justify a certain wage simply will not get hired. By creating and raising the minimum wage, you create a group of people who are unemployable. And […]

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