Thursday, 30 April 2015

The "Living Wage" Mistake

Guest post by Ryan McMaken

cutting billsMuch of the push to raise minimum wages centres on the assumption that each individual worker should be paid an amount allowing a worker to purchase food, health care, transportation, and housing based on that one wage alone. In many cases, the living wage claims extend to the claim that each worker — or two adult workers, in some cases — should be able to support a family of four or more.

Unfortunately, the “solution” to this challenge generally proffered these days is the minimum wage, which as we have seen here, here, here, and here, only serves to place the burden of subsidising a living wage on the shoulders of the least skilled, least experienced, and often most impoverished workers.

Those who advocate for a living wage generally assume that if the cost of living is high, the primary response should be to simply raise wages. This has the political advantage of placing the costs of the “solution” onto a minority group such as employers (with small, poorly capitalised employers being most impacted by these new mandates) and low-skilled employees (whose jobs will be largely replaced by machines or outsourced as a result of the mandate).

Real Wages Matter Most

Moreover, it should always be remembered that there are two sides to the cost of living equation. There are the nominal wages themselves, measured in the dollars in your pay packet, but there is also the cost of living as manifested in the cost of housing, food, health care, and other costs – in other words, how much can your pay packet actually buy.

In other words, if we wish to make things easier for low-income earners, the actual goal needs to be to raise the real wages of low-income households - and to do this, we must look at their costs as well as incomes.

If we look just at incomes, for example (especially if you do not understand how minimum wages condemn many to unemployment), it’s easy to imagine simply mandating higher wages, sitting back, and expecting stones to be turned into bread. They imagine it’s easy, especially since such mandates do not require any new government outlays or new taxes. They do not realise the real costs are borne elsewhere.

When we look at costs, we realise immediately things are more complex. It’s another matter altogether to decree that housing costs shall be lower, or that patients can only be charged some maximum amount for, say, antibiotics. While many persist in believing that a price floor on wages produce no ill effects, virtually everyone today has been forced to admit that price ceilings on goods and services lead to shortages. Many still remember the price controls of the 1970s that led to gas lines and other shortages. And while rent control persists in some older cities, only the most committed economic illiterates advocate for new rent controls in younger, modern cities. Virtually everyone admits that a price ceiling on rents would simply make new housing development wither away, and thus reduce its supply.

From the interventionist perspective, the only other alternative, therefore, is to subsidise the desired goods and services. “We can’t put a price ceiling on retirement care,” they’ll say, “but we can subsidise it.” This is more politically complicated because in order to subsidise, the government must tax and spend. In the case of retirement care, of course, government lowers the cost of retirement care (for some people) with subsidy programs like the Residential Care Subsidy. With housing, we can subsidise through accommodation supplements, or through programmes that subsidise construction of housing units. Governments can also subsidise public transportation that tends to only be economically feasible in dense urban situations.

Of course, there are alternatives to government mandates when seeking to lower the cost of living. But none of these are acceptable to interventionists. These solutions involve making amenities and necessities like housing, retirement care and transportation more plentiful in the marketplace through entrepreneurial activity, and thus more affordable to households at all income levels.

Lowering the Cost of Living

Not just unacceptable to an interventionist, but damned difficult for them even to imagine. But without their ‘help,’ it is possible.

For example, lowering regulatory barriers to the production of housing, such as removing  inclusionary zoning laws, urban growth boundaries, and ordinary zoning laws would contribute to bringing down soaring housing costs. In addition, mandates on building in streets with old houses that are imposed so that higher-income residents don’t have to look at “cheap-looking” housing when they drive by it on their way to work, would certainly be a step in the right direction as well. And of course, there are controls on immigrant labour that drive up the cost of housing construction; consent fees, development levies and delays with council; the increasing cost of monopolistic building products; and a thousand other little regulations that can move a proposed new housing project from the “profitable” column to the “unprofitable” column, which means less housing is built.

Similarly, with retirement and health care, powerful interest groups ensure that the supply of physicians is limited by cronyist politician-appointed state medical boards, and the cartelisation of medical schools. There are government limitations on the importation of affordable drugs, and the FDA ensures that only the wealthiest and most politically powerful pharmaceutical companies can obtain worldwide approval for new drugs. And Obamacare has now made the introduction of innovative new low-cost treatments more difficult as well.

Similarly, government mandates increase the cost of transportation by maintaining monopoly powers for taxi services while clamping down on cheaper options like ridesharing. Government zoning laws and subsidization of highways reduce urban density which is necessary to make transportation options like bus lines and street cars economically viable. Countless government regulations and programs like Cash for Clunkers that encourage the destruction of old cars drives up the price of used automobiles.

But, if we were to really take a hard look at the true sources of the “living wage” problem, we’d soon find ourselves being forced to admit that what is driving so much of the lack of affordability in housing, retirement health care, and more is the interventionist economy itself

For those who tell us repeatedly that it is the government we must thank daily for keeping us safe, for keeping us healthy, and for giving us the goods that the capitalists are too mean and stingy to give us, taking such a hard look would be anathema. So, instead, they’re left with the simple-minded strategy of mandating higher nominal wages, while watching increases in real wages being constantly eliminated or diminished by an endless array of government prohibitions on economic activities that would make goods less expensive and more plentiful for all of us.

Ryan McMaken

Ryan W. McMaken is the editor of Mises Daily and The Free Market. He has degrees in economics and political science from the University of Colorado, and was the economist for the Colorado Division of Housing from 2009 to 2014. He is the author of Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre.
This article first appeared at the Mises Daily. It has been altered slightly to fit the local context.

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