Tuesday, December 15, 2020

The Problem with Minimum Wage Laws

The problem with minimum wage, especially at the federal level, is that it does not address the root of the problem it is intended to solve; it’s just another band aid policy which liberals are very good at doing. If you understand Ricardo’s law of rent you know that the floor of wages or the general rate of wages depends on the margin of production: what unexceptional or unskilled labor can earn on the best available marginal land (i.e. land that is not being leased). In modern times there is very little land left unclaimed thanks to suburban sprawl; however, the law of rent is still applicable when comparing urban land in a CBD being used in its most productive capacity as office suits to rural land being used in its least productive capacity as a homestead. The rent of the former is the difference between these two. It’s obvious that labor has a lot more bargaining power and the proposed $15/hour minimum wage has a lot more purchasing power on rural land than it does in the CBD. All things being equal a $15/hour minimum wage would prompt unskilled labor to move from the CBD to the surrounding rural counties where they would have more purchasing and bargaining power. However, in reality there aren’t enough job opportunities or open land to support millions of unskilled workers moving from urban cores to rural areas; in fact, rural counties are shrinking for this very reason.

The historical reality is urbanization: capitalism concentrates more capital (and thus job opportunities) on urban land over time. Conversely, rural land, mostly as a consequence of industrialized farming, is used in less productive capacities overtime and therefore rural areas provide less job opportunities. So a $15/hour minimum wage would not actually help unskilled labor in rural areas. What about urban areas? Here the problem isn’t economic deprivation but increased productivity being accompanied by higher rents or as most people observe it stagnant wages and rising rents. Between 1984 and the current year, rents ( real estate prices) have risen by an average inflation rate of 3.3% per year and only shrunk during recessions, which in practical terms means an apartment that cost $1,000 a month in 1984 now costs $3,200 per month now. By comparison consumer prices have only experienced an average inflation rate of 2.5% per year so $2500 today would have the same purchasing power as $1000 in 1984 . If we look at big metros where housing costs far exceed construction costs we see that real estate price inflation is even higher. In the past decade, rents have only risen by an average of 36% nationally which is higher than the 27% growth in median household income over the same period but is not as severe as the average rise in rents for big metros like Seattle (77%) or San Francisco (70%) or Phoenix (71%) or Denver (85%) or Los Angeles (65%). Over the same time period, median household income has only risen 36% in Los Angeles, 55% in Denver, 41% in Phoenix, 61% in San Francisco and 59% in Seattle. Of course, minimum wage workers are not in the 50 percentile and are feeling the squeeze of real estate price inflation the worst. Raising the minimum wage to $15 or $18 an hour would still leave them far from the median income and affordable housing out of reach in these metros.

If we look at the predicament in terms of housing stability, spending no more than 1/3 of income on housing, rather than the federal poverty line, which is a poor predictor of economic outcomes given that the cost of living varies wildly across the country, we see that unskilled workers would need to make $26.51 per hour to afford a studio apartment in NYC, $42.25 per hour to afford a studio apartment in San Francisco county, $31.29 per hour to afford a studio apartment in Seattle, $24.60 per hour to afford a studio apartment in Los Angeles, and $21.42 per hour to afford a studio apartment in the Denver metro area. Of course, people making more than the proposed $15/hour minimum usually have some exceptional license, degree or certification that gives them an advantage over unskilled labor. The only advantage of the $15 or $18 hour minimum wage would be pushing unskilled workers over the poorly conceived federal poverty line and making them ineligible for programs like Medicaid or SNAP. Case in point, you cannot solve problems like the affordable housing shortage in big cities or dwindling job opportunities in rural counties by artificially raising wages at the bottom. Financial and housing instability will persist despite what the federal poverty guidelines might tell you.

No comments:

Post a Comment