Minimum Wage and Commodity Pricing

George Will has a rather standard column, with which I basically agree, on why increasing the federal minimum wage is both politically expedient and economically silly.

He gets into trouble, though, toward the end of the piece:

But the minimum wage should be the same everywhere: $0. Labor is a commodity; governments make messes when they decree commodities’ prices.

As Kevin Drum observes, “This, in a nutshell, is the core problem with conservative economics: it views workers as commodities. Naturally it follows from this that we should be free to treat workers like commodities, rather than as human beings.”

The Wikipedia definition is a pretty good one: “a commodity is an undifferentiated product, good or service that is traded based solely on its price, rather than quality and features.” Obviously, people are the exact opposite of commodities; they are unique beings with incredible difference in quality and skills (“features” likely has the wrong connotation).

Then again, in the context of the subset of workers who would be impacted by a change in the minimum wage, Will’s word choice is close enough to be defensible. (Indeed, I used that term this morning in a discussion of the contretemps over Wal-Mart’s use of flexible scheduling of its employees.) The lower the skill level of the worker, the more easily replaceable he is. People who work on assembly lines or flipping burgers at McDonald’s are essentially undifferentiated from the perspective their firm. If your job can be easily outsourced to an illiterate Third World peasant or your employer can hire someone off the street at minimum wage and train them to your level of proficiency in a day or two, you’re pretty much a commodity.

Update (Steve Verdon): I’d also add that Drum is a bit out to lunch on this. I don’t think Will is saying that workers/people should be treated as commodities, but that their labor should be treated like a commodity. Drum’s reading of Will is rather perverse in that one could then say “conservative economics” advocates slavery.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Fersboo says:

    The difference between a ‘worker’ and a ‘professional’.

  2. Anderson says:

    Drum’s reading of Will is rather perverse in that one could then say “conservative economics” advocates slavery.

    Well, remind me again, what are the free-market arguments against slavery? Should I be allowed to sell myself into slavery? What about my freedom to contract?

    As JJ’s post itself exemplifies, treating people like commodities displays a lack of respect for them as human beings.

    One’s suitability for a good-paying job testifies to one’s economic value, but not to one’s value as a human being, who needs food, clothing, and shelter the same as more economically gifted people do.

  3. NoZe says:

    As has been noted, it doesn’t sound like Will is saying that WORKERS are commodities, only that their LABOR is. As Brother Karl noted, labor is generally all that the proletariat have of value to sell!

  4. James Joyner says:

    One’s suitability for a good-paying job testifies to one’s economic value, but not to one’s value as a human being, who needs food, clothing, and shelter the same as more economically gifted people do.

    True enough. Still, as a practical matter, McDonald’s can’t pay enough money to buy a house, food, and clothing for 40 hours work flipping hamburgers. What would that translate into, $20 Big Macs?

    There’s a humanitarian argument against slavery and for ensuring that the least among us have human dignity. We’ve solved the former with the 13th Amendment. The latter, we should address by better allocation of public education resources and through private charity and government welfare programs, not mandates on business.

  5. legion says:

    Still, as a practical matter, McDonald’s can’t pay enough money to buy a house, food, and clothing for 40 hours work flipping hamburgers. What would that translate into, $20 Big Macs?

    Well, if your example were true, it doesn’t mean that the idea of paying such wages to burger-flippers is impractical – a more rational assumption in such conditions would be that either a) housing/food/clothing/etc are all vastly inflated, or b) Big Macs are vastly undervalued.

    While defining a basic level of human dignity may be a moral issue, it still results in a minimum income level people should be expected to get by on. Once you take that step, how is it improper, either morally or economically, to esstablish a minimum wage business are allowed to pay?

  6. Billy says:

    George Will on work, spoken like someone who has never done a day of it in his life.

  7. JKB says:

    Labor is a commodity. Unions arose to create a cartel of that labor and to control the quantity available. If you weren’t in the union, you didn’t get to work that job at any wage. Prior to unions, workers competed their labor against each other, usually bidding down the wage or working conditions. The minimum wage also prevents workers from competing their labor against each other. By setting a floor price, the government ensures low-labor in the local economy is stable. Without a floor, wages would fluctuate depending on the number of unskilled workers. Eventually, low-wage earners would start to migrate to higher paying locales, then back again as the wages changed. A migrant labor force wouldn’t buy homes and would overload and abandon local services as wages rose and fell. This is isn’t something people like in their community as can be seen in the attitudes by residents about the more migrant tendencies of some immigrants, especially illegals.

    That there is now a renewed interest in raising the minimum wage might be more of an indication of low-wage earners starting to migrate from areas where the cost of housing has run up the cost of living. An increase in the minimum wage will put pressure on all the lower end wages as people tend to compare themselves against others. If you were making $5 over minimum wage and the minimum wage is increase by $2, so that now you are only making $3 over minimum wage, many will feel poorer although in reality nothing changed for them. Eventually, the employer will be forced to increase his wages back to the relative differentials over minimum wage prior to the increase.

  8. sociodems. says:

    Politicians gave themselves a 25% raise and .25 cents minimum wage.

    Labor and politicians? It’s all dems and we make sh it, so where’s the payoff?

    Canada seems to be following the US, but instead of a 25% raise, heads are rolling……………

  9. James Joyner says:

    legion:

    Some jobs just aren’t worth that much money. Indeed, we’d have a stalemate at the low end of the economy. How does a single mom hire a baby sitter, say, if she has to pay someone more money than she’s taking home (since her minimum wage comes minus taxes and such)?

  10. As a practical matter, low-skilled labor is a commodity. Always has been, always will be. Given that, Mr. Will is right to say that the government shouldn’t be fixing prices on commodities. But to claim, as Mr. Drum does, that that statement is equivalent to thinking that people are commodities takes a special brand of either ignorance or ill will. This is partisan and ideological hackery at its best, or worst, depending on your perspective.

    To paraphrase Homer Simpson, “stupid free markets.” I’ve always wondered exactly what it is about freedom and all its attributes that drives liberal and progressive “thinkers” like Mr. Drum to write such inane commentary.

  11. Cousin Dave says:

    Workers are not commodities. That was obviously a poor choice of words on Will’s part. However, certain categories of labor are commodities, in that pretty much anyone can do that work with minimal or no training. Some categories of labor are clearly not commodities (say, engineering or law), but the pay for these categories will never be effected by any minimum-wage law ever likely to be passed.

    JKB, in the area where I live, unskilled labor pretty much is migratory already. Minimum wage laws have not affected it. By and large, they do not relocate for better pay. If they want better pay, they get it by educating themselves and getting better jobs. For the rest, their migration is not driven by rational financial considerations. Rather, they migrate either out of a grass-is-greener belief (“If I just move to city X, I’m gonna hit it rich!”), or because they are running from something: unpaid bills, warrants, or the Bruiser whose girlfriend they had an affair with. To put it bluntly, they are not interested in working any more than they absolutely have to in order to get by. If their pay goes up, they respond by working less and/or by spending it on illicit activites, such as drugs or prostitution. That may sound harsh, but if you could see the state of the construction industry around here, you’d know what I’m talking about. Employers of unskilled labor around here all say that they can’t keep an employee for more than a few months — either they quit once they have a few bucks in their pocket, or the employer has to fire them for coming in stoned.

    The days of the noble factory worker busting hump at the plant every day for 40 years and coming home to the wife and kids every evening are pretty much gone. And what manufacturing jobs remain are skilled or semi-skilled technical jobs. A factory can’t just yank someone in off the street and put them in charge of a CNC milling machine.

    I think you’re partially right in your theory about how an increase in the minimum wage makes people who make just above that wage feel poorer. I know I felt that way when I was 20 and worked in a restraunt and the 1980 minimum wage hike “wiped out” my recent raise. However, I think you are incorrect in your assumption about what happens after that. My observation is that it winds up eliminating semi-skilled jobs, while increasing the supply of unskilled labor of which there is already an oversupply. Why does this happen? My wife manages a medical lab and she employs phlebotomists, most of who make around $11/hr. Some Democrats have proposed that the minimum wage be raised to $10/hr. What would these semi-skilled phlebotomists do if that happened? I asked a few of them and I got three responses. Some said that they would go back to school and get RN degrees, so they can get a better paying job. Others said that they would work fewer hours or drop out of the labor force, on the assumption that their spouse’s pay would go up (most of them are women). Others said they’d quit and take an unskilled job with less stress and no training requirements, at about the same pay. None said they’d stay in their current job, because they all assume that the minimum-wage increase will conincide with inflation. And quite frankly, they don’t want to known as minimum-wage workers.

    So what would happen is that the lab would have to increase their pay considerably in order to obtain phlebotomists in the resulting seller’s market. Unable to pass the increased cost along due to both competition and artificial constraints on the medical market, they would probably respond by consolidating locations, serving the same number of doctors and patients with fewer employees. Patients would have to drive farther and wait in line longer. Doctors would have to wait longer for results. The lab’s profit margin would probably drop, even with the consolidation. And a category of jobs that traditionally provides a foot in the door to the medical field for people without much education would dry up. Everyone loses in that scenario.

  12. William d'Inger says:

    Increasing the Minimum Wage increases the cost of anything made with labor which in turn increases the price of virtually everything. Those price increases TOTALLY negate the economic gains labor THINKS it got out of the deal. Any educated person knows that.

    Increasing the Minimum Wage is the Democratic Party’s mechanism for buying the Ignorant-American vote and having you, the consumer, pay for it. It is a cruel deception, but if the public is so easily duped, there isn’t much I can do about it.

  13. just me says:

    Who actually works for minimum wage? Even the low skilled worker at entry level will at some point make more than minimum wage.

    I am not sure that a slight dollar or so increase would have a huge impact, even on McDonald’s given that around here there isn’t a company that starts even non experience entry level people minimum wage. McDonald’s starts people off around $7 and Wal-Mart pays $8-9.

    But that is as much an indicator of the market determining the salary-around here McDonald’s can’t find people willing to work for minimum wage, so they have raised the starting salary.

  14. Steve Verdon says:

    As JJ’s post itself exemplifies, treating people like commodities displays a lack of respect for them as human beings.

    One’s suitability for a good-paying job testifies to one’s economic value, but not to one’s value as a human being, who needs food, clothing, and shelter the same as more economically gifted people do.

    Again, I think you, like Drum, are reading more into it than is actually there. That people say that slavery is bad and shouldn’t be condoned doesn’t mean that in general free market principles/practices are bad. In fact, the free market is what has brought about a great deal of prosperity even for those of “low economic value”.

    Well, if your example were true, it doesn’t mean that the idea of paying such wages to burger-flippers is impractical – a more rational assumption in such conditions would be that either a) housing/food/clothing/etc are all vastly inflated, or b) Big Macs are vastly undervalued.

    Somebody failed basic economics…at least the neoclassical kind, maybe not the Marxist kind.

    While defining a basic level of human dignity may be a moral issue, it still results in a minimum income level people should be expected to get by on. Once you take that step, how is it improper, either morally or economically, to esstablish a minimum wage business are allowed to pay?

    The flaw in your argument is the assumption that somebody other than the individual is responsible for that minimum income level and if they can’t attain it others must provide it for them. This gets back to your failure to appreciate neoclassical economics and the problem of incentives.

    I’d also add that nobody is actually really interested in doing this. No liberal, leftist, rightie, conservative, libertarian, commie, etc. The scheme would be etra-ordinarily simple. If the “minimum income” is $x annually, then structure the tax system so that everybody gets at least $x via a negative income tax below that dollar figure and a positive income tax above it. Such a scheme could be structured to be incentive compatible–in everyday language so that nobody will pass up an opportunity to better their situation. That it isn’t done/proposes/supported/etc. suggests that nobody really believes what you have written…even you.

  15. Steve Verdon says:

    Increasing the Minimum Wage increases the cost of anything made with labor which in turn increases the price of virtually everything. Those price increases TOTALLY negate the economic gains labor THINKS it got out of the deal. Any educated person knows that.

    No, that isn’t quite true…at least as a general principle. It could be the case, but what you are claiming is an empirical assertion and hence can only be verified empircally and in some situations may not hold. The problem is that while firms want to pass on cost increases such as the increase in the minimum wage, they can’t pass along all of the cost as a general rule. The problem stems from the fact that supply and demand curves have postive (negative) slopes and that firms (consumers) can do things like substitute and reduce consumption.

  16. William d'Inger says:

    No, that isn’t quite true…at least as a general principle. It could be the case, but what you are claiming is an empirical assertion and hence can only be verified empircally and in some situations may not hold. The problem is that while firms want to pass on cost increases such as the increase in the minimum wage, they can’t pass along all of the cost as a general rule. The problem stems from the fact that supply and demand curves have postive (negative) slopes and that firms (consumers) can do things like substitute and reduce consumption.

    I agree that what you say is true, but there isn’t enough space here to delve deeply into all the specific possibilities. My basic argument is the Minimum Wage does not ease the economic suffering of the poor as the liberals want the public to believe.

    My community (Metairie, LA) was devastated by hurricane Katrina. In the aftermath, labor was scarce and businesses adjusted to the situation. For instance, I drove past stores with signs reading “$500 signing bonus, no experience necessary”. I overheard people claiming they were getting additional $500 bonuses for working 30 days without a day off. The starting wage of hamburger flippers went to $10 per hour. It all happened without government intervention.

    The free market works. It pays whatever labor is worth. On the other hand, political intervention, such as the Minimum Wage, disrupts the economy. Everything costs more than it should, and it hurts the minimum wage earner along with everybody else.

  17. steve says:

    As has been noted, it doesn’t sound like Will is saying that WORKERS are commodities, only that their LABOR is

    .

    Can anyone point me to a sustained, philosophical argument to support this ontology?

  18. legion says:

    That people say that slavery is bad and shouldn’t be condoned doesn’t mean that in general free market principles/practices are bad. In fact, the free market is what has brought about a great deal of prosperity even for those of “low economic value”.

    Steve,
    I’m not of the opinion that free markets are necessarily bad, but I take extreme issue with Will’s position (one which is often, IMO, implicitly linked to free markets, though you don’t do it here) that industry self-regulation is perfect & that the gov’t has no business even setting a minimum wage.

    Somebody failed basic economics…at least the neoclassical kind, maybe not the Marxist kind.

    You read too much into my statement – I was merely attacking your straw man of a $20 burger. As just me & others have already discussed, changing the cost of the people flipping the burgers at the delivery end of the chain doesn’t necessarily mean the cost of the product will change… If the public won’t pay more than $x for a burger, then McDonald’s will either find a way to deliver it at that price, or stop making it. That’s unrelated to the cost of keeping a roof over one’s head.

    The flaw in your argument is the assumption that somebody other than the individual is responsible for that minimum income level and if they can’t attain it others must provide it for them. This gets back to your failure to appreciate neoclassical economics and the problem of incentives.

    Not really. The employer is “responsible” for paying the employee, regardless of the wage – that’s not changing. What the minimum wage does is prevent labor competition (or business collusion) from driving wages down to the point where the labor pool is limited to people who can/will live in squalor, rather than the pool of people who are merely capable of doing the job.

    The scheme would be etra-ordinarily simple. If the “minimum income” is $x annually, then structure the tax system so that everybody gets at least $x via a negative income tax below that dollar figure and a positive income tax above it.

    I don’t believe it goes to the point of a negative tax, but doesn’t the Earned Income Tax Credit already lean this direction?

  19. Steve Verdon says:

    I’m not of the opinion that free markets are necessarily bad, but I take extreme issue with Will’s position (one which is often, IMO, implicitly linked to free markets, though you don’t do it here) that industry self-regulation is perfect & that the gov’t has no business even setting a minimum wage.

    I happen to agree with Will and think that you and Drum are either being deliberately obtuse or are amazingly ingorant on this. Treating labor as a commodity does not mean one has to treat people as a commodity. I sure hope you see people as more than just their labor. I’ve somewhat sarcastically made off-hand comments implying your are a supporter of Marxism, but if you truly do see people as merely the embodiement of their labor you are a hard-core Marxist, or at the very least you accept one of its core tenents.

    You read too much into my statement – I was merely attacking your straw man of a $20 burger. As just me & others have already discussed, changing the cost of the people flipping the burgers at the delivery end of the chain doesn’t necessarily mean the cost of the product will change… If the public won’t pay more than $x for a burger, then McDonald’s will either find a way to deliver it at that price, or stop making it. That’s unrelated to the cost of keeping a roof over one’s head.

    In a sense you are right in that nobody will pay $20 for a burger so the firm will simply shut down. You are wrong in that firms do try to pass along their costs. That they can’t do it perfectly does not mean that an increase in a factor price wont lead the firm to try and raise prices, especially if the price increase for the factor of production is imposed on the entire industry. This is where you completely fail to appreciate the underlying logic of neoclassical economics and its insights into how markets work.

    Not really. The employer is “responsible” for paying the employee, regardless of the wage – that’s not changing.

    Again this is a flawed understanding. The employer-employee relationship is hardly different from that of the seller-consumer. Do you feel responsible to pay for something you do not want at a given price? No, of course not. Same goes for employers. You have constructed this false dichotomy and are ignoring that you have done so.

    What the minimum wage does is prevent labor competition (or business collusion) from driving wages down to the point where the labor pool is limited to people who can/will live in squalor, rather than the pool of people who are merely capable of doing the job.

    Let us make an assumption that the minimum wage is currently below the current market clearing price. If that is so, then people working for these wages, by your assumption, are living in squalor. While I suppose that is true for a subset of the working population, I doubt it is true to the extent you are implying. If this is true, then your argument is completely without merit.

    I don’t believe it goes to the point of a negative tax, but doesn’t the Earned Income Tax Credit already lean this direction?

    Yes that is what the EITC does, but the minimum amount isn’t determined by what is considered a “minimal living standard”. Basically, the scheme would work so that if you decided to sit around on your ass all day, you’d still get that minimal living standard.

  20. legion says:

    I happen to agree with Will and think that you and Drum are either being deliberately obtuse or are amazingly ingorant on this. Treating labor as a commodity does not mean one has to treat people as a commodity. I sure hope you see people as more than just their labor. I’ve somewhat sarcastically made off-hand comments implying your are a supporter of Marxism, but if you truly do see people as merely the embodiement of their labor you are a hard-core Marxist, or at the very least you accept one of its core tenents.

    Huh? That has nothing to do with anything I’ve said in this thread… I’ve taken no position on people as commodities, my point is that self-regulation (in this particular case, letting the free market dictate minimum wages rather than the gov’t) is a disaster without some form of externally-applied standards and/or enforcement.

    In a sense you are right in that nobody will pay $20 for a burger so the firm will simply shut down. You are wrong in that firms do try to pass along their costs. That they can’t do it perfectly does not mean that an increase in a factor price wont lead the firm to try and raise prices, especially if the price increase for the factor of production is imposed on the entire industry.

    That’s not what I said. I said _if_ the public won’t pay $20 for a burger. I’m sure there are 5-star restaurants that that do sell $20 hand-raised kobe-beef burgers, but I wouldn’t consider them in the same ‘industry’ as McD’s; nor would they be affected in the same way by a minimum wage increase. I don’t know what exactly falls under the heading of ‘neoclassical economics’, but I understand the concept of a profit margin… Not every cent of the purchase price is driven by manufacturing costs, but also by the company’s expectation of a reasonable profit margin. If the price is already at the market ceiling, the company may have to evaluate cutting into that margin in order to continue producing that product. Maybe it’s worth their investment, maybe not.

    The employer-employee relationship is hardly different from that of the seller-consumer. Do you feel responsible to pay for something you do not want at a given price? No, of course not. Same goes for employers. You have constructed this false dichotomy and are ignoring that you have done so.

    And you assume that the decision to buy a random product is as simple as the decision to keep a given job – it’s a real dichotomy…

  21. Rick DeMent says:

    I would simply argue that anything like a “free market” exists, ever did or even could. In fact I would go so far as to say a truly “free” market is an impossibility since all markets are constructed to some extend by some form of regulation be it formal or ad hoc making all of these arguments about what should or should not be allowed under a “free market” silly.

    Also while labor is certainly a commodity in an economic sense it is imposable to abstract “labor” form individuals and to do so is where the arguments about treating “labor” a commodity fall apart.

    “Treating labor as a commodity does not mean one has to treat people as a commodity.”

    Other then the idea that you can’t except in an economic model. In the real world the two are inexplicably linked.