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The "Living Wage" Mistake

Economics / Wages Apr 25, 2015 - 05:57 PM GMT

By: MISES

Economics

Ryan W. McMaken writes: Much of the push to raise minimum wages centers on the assumption that each individual worker should be paid an amount that allows the 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 subsidizing 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 capitalized 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, but there is also the cost of living as manifested in the cost of housing, food, health care, and other costs. In other words, if we wish to make things easier for low-income earners, the goal needs to be to raise real wages, and to do this, we must look at costs as well as revenues for low-income households.

For those who do not understand how minimum wages condemn many to unemployment, it’s easy to simply mandate higher wages, sit back, and expect stones to be turned into bread. In any case, such mandates do not require any new government outlays or new taxes. The costs are to be borne elsewhere.

It’s another matter, however, 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 subsidize the desired goods and services. “We can’t put a price ceiling on medical procedures,” they’ll say, “but we can subsidize it.” This is more politically complicated because to subsidize, the government must tax and spend. In the case of health care, of course, we lower the cost of health care (for some people) with subsidy programs like Medicare and Medicaid. And today, we now have Obamacare which imposes new costs on some to subsidize the health care of others. With housing, we can subsidize through section 8 or similar programs that subsidize construction of housing units. We can also subsidize public transportation which 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, health 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

Lowering regulatory barriers to the production of housing, such as inclusionary zoning laws, urban growth boundaries, and ordinary zoning laws would contribute to bringing down soaring housing costs. In addition, mandates on ornamentation and masonry 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 labor that drive up the cost of housing construction, 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 health care, powerful interest groups ensure that the supply of physicians is limited by cronyist politician-appointed state medical boards, and the cartelization 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 approval for new drugs. Local ordinances and state laws ensure that few new hospitals are built.

Similarly, government mandates increase the cost of education 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 it is the interventionist economy that is driving so much of the lack of affordability in housing, health care, and more. 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, such an approach would be counterproductive at best. So, instead, we’re left with the simple-minded strategy of mandating higher nominal wages while increases in real wages are 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 W. McMaken is the editor of Mises Daily and The Free MarketSend him mail. See Ryan McMaken's article archives.

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© 2015 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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