Is minimum wage law part of free market economy?

Hey there, time traveller!
This article was published 04/06/2011 (5613 days ago), so information in it may no longer be current.

BY ROSEMARIE AND CHESTER LETKEMAN

Kudos to the person quoted in the Tuesday, May 31, Sound Off section regarding the price of rents in Brandon.

The person suggests that one “had better be making at least $30 an hour” to pay the rents being demanded in Brandon.

Whoever this person is, he or she knows more about economics than the business persons and their supporters who consistently bewail the increases to the minimum wage including the pending increase to $10 per hour.

Many years ago, make that centuries ago, Adam Smith wrote a book, in which he defined, what we now call the “free market” economy as being the best economy for ensuring the maximum wealth of nations and its citizens.

Smith wrote that if everyone would just ensure that all their economic decisions were based on personal self-interest that we would all be better off. So when we hear people invoking the “free market” and self-interest as the means to a brighter, happier future they are talking about Smith’s theory.

What nobody mentions though is that Smith made some important assumptions and observations regarding the efficiency and effectiveness of a “free market” economy.

With regard to the issue of minimum (worker) wages he made two particularly important assumptions. The first one was that wages would be (not should be but would be), at a minimum, equal to the costs of living for a worker — that is, the costs of shelter, food, clothing.

Today, we can probably add to that list the costs of goods and services which make a person employable and available for employment such as, education, health, fuel, communication, and transportation.

When we apply this assumption of Smith’s to the issue that the person represented in Sound Off, we come to some interesting observations.

But first, a more modern assumption.

The general rule of thumb, used by bankers and economists, is that a person/family should pay no more than one-third of her/his wages on shelter, that is, housing. A person who earns the pending minimum wage of $10 an hour, working eight hours a day, five days a week and on average 22 days a month would earn $1,760 per month. Based on these figures, a person earning the minimum wage should be paying, according to Smith, no more than $581 (33 per cent of $1,760) per month for housing.

No self-respecting landlord in our “free market” economy would accept a price of $581 per month. Turning the calculation around, if landlords charge, at a minimum, $800 per month for housing, Smith would recommend a minimum wage of $13.77 per hour. If housing costs $1,000 per month then the minimum wage would be $17.22 per hour.

Not quite the $30 per hour as suggested in Sound Off, but getting closer to an adequate wage to survive.

Of course, one can argue that the work day, the work week, work month could or should be lengthened. Twelve- to 16-hour days were common in the history of the developed world. In other countries around the world, long days are still common.

One can argue that for the married couple, both spouses should work. Maybe the children could be sent out to work as well. Maybe at a minimum two workers and their respective families should share housing. This moves us away from the issue as a problem of economics. Workers are human beings, so now the issue is one of ethics and morality.

The second assumption made by Smith regarding minimum wages is that employers would pay the minimum “living” wage because they (the employers) would behave morally and ethically.

Employers would understand that workers also have input costs. These would be the costs of food, clothing, shelter and, in modern terms, the costs of education, etc., Smith assumed that employers would accept the responsibility for ensuring that his/her employees’ wages were sufficient to meet his/her needs.

As well, Smith assumed that employers would understand that should the worker not have the financial wherewithal to meet their necessities of life they would not have workers, they would not have productive workers, they would not have consumers for their products.

In other words, the “free market” would operate according to theory — the employer in pursuing his/her, both long-term and short-term, self-interests would ensure that his/her workers had sufficient wages to purchase the necessities of life and maybe some left over to buy the incidental extravagance.

However, we know this is not how our economy operates.

The issue that the person references in his/her opinion on Sound Off is the disconnect between the landlords (or institutions holding mortgages on housing) and employers.

Landlords will not charge less for housing than they have to or want to. Employers will not pay more for wages than they have to.

The worker — well he or she is just caught in the middle with no significant personal influence on either the landlord or the employer. The result is a wage earner with limited capacity to pay for housing without jeopardizing the purchase of the other necessities of life — food and clothing.

Assuming that the cost of housing is justified in terms of costs and reasonable profits, it leaves the employer with the responsibility to provide adequate wages for the worker to purchase the necessities of life.

The employers who pay at the minimum wage argue that they will pass on their increased wage costs to the consumer in the form of higher prices for their products. But this is normal practice as input costs increase.

As a threat to us as the consumer, it is an empty threat when we are faced with the daily threats and realities of food prices going up, fuel costs increasing, housing prices tripling over recent years. Other employers will see the minimum wage increase as an opportunity.

With more money in the economy they can expect opportunities for growth because every penny earned by a minimum wage earner is spent, primarily in the local economy. And so the economy goes about its business.

Smith was a proponent of government non-interference in the economy. But he was well aware that the principle of self-interest would lead to unsupportable and undesirable consequences. Smith recognized the need for governments to correct the vagaries of the “free market.”

A modern day example of such a correction is the minimum wage regulation.

Interestingly enough, a regulation that helps the economy to function in the manner that Smith said it should.

Rather than bemoan increases to the minimum wage, we should bemoan the need for such legislation.

» Rosemarie and Chester Letkeman are from Brandon.