Arguments For and Against the Living Wage

Recently a friend from law school, Garret, commented on a pro-Bernie Sanders facebook post I made saying that what Bernie has in mind for our country is economic suicide. A couple of exchanges later we had narrowed down the conversation and established that he is against the living wage, that is a minimum wage of $15/hour, while I, like Bernie, support it (Hillary supports an increased minimum wage but has declined to advocate for the $15/hour wage). Inspired by our back and forth on facebook I asked Garret, who has a masters in economics, if he was interested in co-authoring a pro/con living wage piece and he agreed.


Here’s the Con argument:

Murray Rothbard, one of the leading Austrian economists of the 20th Century once said;

“It is no crime to be ignorant of economics … but it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

Here today, I reflect upon these words as I skim various political websites targeted at Millennials, Facebook, and if I really want to feel depressed about the future of our nation I start reading the YouTube comments under Bernie Sander’s speeches discussing the “living wage.”  But why?

A “living wage” sounds nice right? I mean, for the person without a clue as to how economics works, the living wage sounds like a socially positive thing to do, you help the poor, and the rich business owners and corporations can raise someone’s wage $8 or so an hour. At least that is how the story for many goes, and thereafter, it becomes a political & emotional issue – losing its economic roots, and ends in nothing but anecdotal evidence & name calling.

But before we get into the economics of it all – let’s get a few things straight.

First, & most important — passing a law that raises the minimum wage does not force employers to raise the wages of those working minimum wage jobs.  All a minimum wage increase law does is force employers to make a choice – 1) Do I raise this person’s wage or 2) Do I fire them?

Second, economics is a science.  It, like physics, does not care at all how you feel about something, or if something is “just” or not.  It doesn’t care who it hurts or benefits, and it cannot be completely controlled.  So, when we talk about economics, check your emotions at the door.

Lastly, labor is a commodity.  If you are unfamiliar with what the term “commodity” means – click here.  Yes, I know it sounds harsh comparing someone’s blood, sweat and tears to a pound of rice – but it is the way it is.  In the video from the link above, pay special attention to the time periods from 0:45 to 0:52.  I’ll summarize here what was said –

“All commodities of the same grade are priced equally and are interchangeable.”      

But why is labor a commodity?  Let’s change the above rule statement to something a bit more understandable when talking about labor as a commodity:

“All employees of the same grade are priced equally and are replaceable.”

Now that this is “everyday” English it should be pretty easily understandable save “same grade” which might be a tad confusing.  A “grade” of employee is “something” that makes the employee desirable for the employer to hire.  It could be a host of different things, such as education, technical skill, linguistic abilities, religion, the way you look, your ability to drive a manual transmission, secret ninja skills, or a combination of the above.
Thus, employees who have no skill should earn the same as other employees that have no skill, and mechanics should earn the same as other mechanics.  But should someone with no skill earn the same as a mechanic?  Intrinsically everyone answers this last question “no” (unless you are a Marxist), but a “living wage” forces the answer to the question to be “yes.”

Explained by example, if the living wage is $15 an hour in a specific local, mechanics make $15 an hour, janitors make $8 an hour – and Bernie gets elected – what happens?  Do the Mechanics’ wages double as well, or just the janitors?  How would the mechanics feel if they don’t get a raise but the janitor does? Who makes the money for the mechanic shop – the janitor or the mechanics?  If the shop manager keeps the janitors, and gives the mechanics a big raise as well, what will the prices do?  If the shop manager keeps the janitors and gives the mechanics a big raise, and raises prices materially to pay for it, how will this shop compete with another shop who kept prices where they were, fired the janitor & gave the mechanics a small raise?

I would encourage you to look at the problems that Gravity Payments is dealing with now after raising everyone’s wages.  While it sounds nice, setting a price floor for labor is devastating for the least skilled in society – e.g., those who the law is intended to help.

And the Pro Argument:
The disappearing middle class is a major problem in America today. More and more people are living paycheck to paycheck with no savings and many who work, even full time, are still forced to rely on government assistance. Raising the minimum wage to a livable sum would save the government money in assistance and even stimulate the economy because more people would have money to spend.
Allowing companies to pay their workers an amount which does not allow them to support themselves is a major contributor to the wealth divide in our country. For example Walmart pays its thousands of employees an average of just over $8/hour while the Walton family has more wealth than 42% of Americans combined and makes billions in profits annually. It seems most appropriate to me for some of these profits to be redirected into the pockets of the employees who show up to work every day and operate the stores and a government mandated living wage would enable that to happen. Its not just Walmart that creates our ever-growing wealth divide, CEO’s today are on average paid 262 times the amount an average worker earns compared with 1965 when CEOs earned a average of 24 times the average workers’ pay. A government mandated living wage may force companies to cut into the seven-figuer sallaries at the top of the totem pole in order to compensate the lower end workers and, again, I think that is appropriate.

As for workers as commodities I don’t disagree but I believe that the living wage is the appropriate marker for the value of the commodity, even for unskilled labor. I think that any job that requires a human to show up and do it ought to compensate that human in a manner that makes it possible to support themselves.

The living wage will allow people to support themselves and reduce reliance on government assistance. It will also put spending money in the hands of more consumers which will benefit the economy as a whole. Requiring a living wage may cut into profits and the exorbitant salaries of high-ranking officials but in so doing it will work to decrease the vast wealth divide that exists in our country today.


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