Tuesday, May 12, 2015

A Few Comments on the Minimum Wage


Back in the late 1960s labor-statesman Walter Reuther testified before Congress on the ideas of Louis O. Kelso, noted as the inventor of the Employee Stock Ownership Plan (ESOP).  Reuther noted that if workers relied on raising fixed wage to increase consumption income, they would end up worse off than before.  Raising wages simply adds to the cost of producing marketable goods and services.

Walter Reuther of the UAW
What did Reuther suggest instead of raising wages?  He was, after all, head of the United Auto Workers, and could hardly be expected to champion the rights of owners and management against workers.

Reuther's answer was profit sharing.  Profits are what is left after all costs have been met and the product sold, so profit sharing does not increase costs to the consumer.  An increase in compensation that comes from profits is thus a genuine increase in buying power.

But what gives a worker the right to receive profits?  After all, if an employer generously gives workers a share of profits, he or she can repent and take it away as easily as it was given in the first place.

Daniel Webster: "Power follows property."
. . . . unless the workers have a legal right as co-owners to a share of the profits!  That was Kelso’s point, and what attracted Reuther to Kelso’s ideas.

Of course, the real importance of Kelso’s ideas is that it is a way to empower workers, not just secure them more income.  “Power,” as Daniel Webster pointed out, “naturally and necessarily follows property.”

That’s why the whole “Raise the Minimum Wage Movement,” while well-intentioned, is going in the wrong direction.  Income doesn’t confer anything except purchasing power — up to a point.  Property confers economic power — which includes purchasing power — but also political and social power.

Let’s take a look at wages, even if just as a way of getting people more income.  All things being equal, and if human labor were truly the only factor of production (as DOL statistics suggest by measuring productivity in terms of output per labor hour), a raise in wages would result in a net gain of zero to workers.  This is because the price level would rise to compensate for the increase in costs.

All things are not, however, equal, and labor is not the sole factor of production.  In addition, suppliers and providers of retail goods tend to raise prices in anticipation of an increase in effective demand (i.e., wages), so that workers pay more in real terms even before they get their increases.  Customers resist paying more for the same goods or services workers produce, decreasing demand, and thus decreasing the need for workers — which also hits any business with high fixed costs . . . such as workers with high wages.  The solution is either to get rid of workers (sometimes you can’t), go bankrupt, or go out of business before you lose what you have.

. . . or you could take the advice of Walter Reuther and shift compensation from fixed wages to variable profits, which not only doesn't increase costs, it gets the workers more than with fixed wage increases in most cases, so they benefit three ways: they have more money to spend when prices aren't going up, the company stays in business, and they don't lose their jobs.

That’s what Capital Homesteading is designed, in part, to do.

#30#

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