Loose Change by Ben Kritz AS I explained in the first part of this lesson on economics, the most accurate way the government could determ...
Loose Change
by Ben Kritz
AS I explained in the first part of this lesson on economics, the most accurate way the government could determine what minimum wages should be would be to establish a minimum wage for every job there is. Different jobs produce goods and services with different values, require workers with lesser or fewer skills, and the job market as a whole is governed by the law of supply and demand – the balance between how many workers are available (supply) and how many jobs they’re needed to fill (demand).
If the government set minimum wages in that fashion, two positive things would result. First, employers would be satisfied because the system would be forcing them to abide by wage levels that they would naturally have to pay anyway in a completely free market. Workers would benefit because the economic model, when it is actually tested (I’ve done it on a small scale), results in wages that are somewhat higher for most jobs than what they are in reality.
Obviously, government doesn’t do it that way, mostly because it would simply be too much work; my experiment with it only involved about 200 jobs, and still took a couple days to complete with the help of a capable statistics software program. Scaled up to the size of the entire country, the task might well be impossible. And of course, employers and probably even some workers would not accept that high degree of government interference in their businesses.
Instead, government resorts to a shortcut: To set minimum wages, what is considered a minimum amount of income a worker needs to live is balanced against what an estimation of what employers will bear, and one single minimum wage figure is provided to cover an area where the cost of living is reasonably consistent.
There are two reasons that doesn’t work, one theoretical and one social. The theoretical aspect of it is that all the variables that determine the price of a unit of labor (one day’s work here in the Philippines) are on the demand side of the equation. As unpleasant as the reality is, a factor like “cost of living” doesn’t have anything to do with it, and trying to include it only results in a mathematical error that can’t be fixed.
The social aspect of it is that as much as employers don’t like being told by the state what labor should be worth to them, people shouldn’t have to abide by government’s estimate of what financial resources they need to live a dignified, healthy life.
I can use myself as an example. I live alone in a small house, and work from home; I can, if I have to, meet all my essential needs – food, shelter, water, electricity, and a small amount for miscellaneous expenses – for about P200 a day. But all that would do is provide me with basic survival, and that is hardly good enough. What I consider worthwhile “living” is quite a bit more than just “surviving,” and it’s up to me to decide what the difference is. The same is true for everyone else; if it were not, there were be no motivation for anyone to work hard, invent new things or new business ideas, or be consumers of anything besides the most basic necessities.
And economics defeats the best intentions of minimum wages in another, even more basic way: As wages increase, so do prices. A minimum wage considered a “living wage” now won’t be for very long and will have to be raised, and everyone finds themselves right back where they started with the same riddle to solve.
In purely logical economic terms, minimum wages ought to be abolished entirely, but that is a frightening prospect for most people. So for the sake of at least feeling like there’s some kind of safety net, they demand that the minimum wage remains, even though it will never work as intended and be enough to live on.
Ben Kritz holds a Master’s degree in Economics and is a former auto industry executive, and writes the thrice-weekly Rough Trade column on business and the economy for The Manila Times. You are welcome to send him your questions and comments at benkritz@outlook.com, or follow him on Facebook and Twitter.
AS I explained in the first part of this lesson on economics, the most accurate way the government could determine what minimum wages should be would be to establish a minimum wage for every job there is. Different jobs produce goods and services with different values, require workers with lesser or fewer skills, and the job market as a whole is governed by the law of supply and demand – the balance between how many workers are available (supply) and how many jobs they’re needed to fill (demand).
If the government set minimum wages in that fashion, two positive things would result. First, employers would be satisfied because the system would be forcing them to abide by wage levels that they would naturally have to pay anyway in a completely free market. Workers would benefit because the economic model, when it is actually tested (I’ve done it on a small scale), results in wages that are somewhat higher for most jobs than what they are in reality.
Obviously, government doesn’t do it that way, mostly because it would simply be too much work; my experiment with it only involved about 200 jobs, and still took a couple days to complete with the help of a capable statistics software program. Scaled up to the size of the entire country, the task might well be impossible. And of course, employers and probably even some workers would not accept that high degree of government interference in their businesses.
Instead, government resorts to a shortcut: To set minimum wages, what is considered a minimum amount of income a worker needs to live is balanced against what an estimation of what employers will bear, and one single minimum wage figure is provided to cover an area where the cost of living is reasonably consistent.
There are two reasons that doesn’t work, one theoretical and one social. The theoretical aspect of it is that all the variables that determine the price of a unit of labor (one day’s work here in the Philippines) are on the demand side of the equation. As unpleasant as the reality is, a factor like “cost of living” doesn’t have anything to do with it, and trying to include it only results in a mathematical error that can’t be fixed.
The social aspect of it is that as much as employers don’t like being told by the state what labor should be worth to them, people shouldn’t have to abide by government’s estimate of what financial resources they need to live a dignified, healthy life.
I can use myself as an example. I live alone in a small house, and work from home; I can, if I have to, meet all my essential needs – food, shelter, water, electricity, and a small amount for miscellaneous expenses – for about P200 a day. But all that would do is provide me with basic survival, and that is hardly good enough. What I consider worthwhile “living” is quite a bit more than just “surviving,” and it’s up to me to decide what the difference is. The same is true for everyone else; if it were not, there were be no motivation for anyone to work hard, invent new things or new business ideas, or be consumers of anything besides the most basic necessities.
And economics defeats the best intentions of minimum wages in another, even more basic way: As wages increase, so do prices. A minimum wage considered a “living wage” now won’t be for very long and will have to be raised, and everyone finds themselves right back where they started with the same riddle to solve.
In purely logical economic terms, minimum wages ought to be abolished entirely, but that is a frightening prospect for most people. So for the sake of at least feeling like there’s some kind of safety net, they demand that the minimum wage remains, even though it will never work as intended and be enough to live on.
Ben Kritz holds a Master’s degree in Economics and is a former auto industry executive, and writes the thrice-weekly Rough Trade column on business and the economy for The Manila Times. You are welcome to send him your questions and comments at benkritz@outlook.com, or follow him on Facebook and Twitter.
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