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April 11, 2005

Alternatives to the Minimum Wage

By Timothy Carter

Republicans want to eliminate the minimum wage. The most explicit statement of this desire comes from the Republican party of Texas, home of President George W. Bush and House Majority Leader Tom DeLay. Their 2004 Party Platform states, "The Party believes the Minimum Wage Law should be repealed and that wages should be determined by the free market conditions prevalent in each individual market." The California Republican Party (CRP) agrees, although they avoid the popular term "minimum wage". Their platform, as currently available on their website, states, "We favor the reduction and elimination of all regulatory barriers and subsidies on trades and occupations."

Analysis reveals that abolishing the minimum wage would be a sensible policy, but only after the establishment of basic income guarantee sufficient to allow individuals to live without working.

Does the free market offer labor a fair wage? On one extreme, some believe that free markets inevitably produce inequities that those who wind up with greater resources can use to leverage unfair deals in their favor from those with lesser resources, creating a vicious circle leading to larger and larger unfair inequities.

At the other extreme, some believe that all free market exchanges are good, since the fact that the participants choose to enter into them indicates that everyone involved is better off. As the CRP platform states, "The CRP affirms its belief that the market economy, allocating resources by the free play of supply and demand, is the most just, efficient and productive economic system known to man."

In the minds of the pro-market people, the anti-market people are envious and see the economy as a zero-sum game, wanting to slice the pie differently rather than worrying about whether it grows or shrinks. In the minds of the anti-market people, the pro-market folks are naive or disingenuous, ignoring the reality of hundreds of years of poverty and misery in capitalist economies.

Often when there are extremists with such divergent views, one finds that the truth lies somewhere in the middle. But not here. In this case, both extremes are correct.

A free market exchange is a zero-sum game embedded in a positive-sum game. Betty owns a widget that is worth $100 to her. Jake does not own this widget and it would be worth $200 to him. If Jake buys the widget from Betty for any amount between $100 and $200, both will be better off and there will be a total increase in value in the world of $100. This is a positive-sum game that grows the pie and makes everyone better off.

But who gets the extra $100, Betty or Jake? If Jake pays $110, his increase in value from the exchange is $90, while Betty's increase in value is only $10. If Jake pays $190, his increase in value is only $10, while Betty's is $90. Negotiations over this $100 are a zero-sum game, and it is here that those with greater resources can leverage deals in their favor, creating a vicious circle leading to larger inequities.

What would cause negotiators to agree to such an inequitable split of a common benefit? In some cases one party may be exploiting a lack of information: If Jake doesn't know Betty values the widget at $100, he may think she values it at $180 and buy for $190 thinking he is agreeing to an equitable split.

But anyone who has sat a negotiation table knows where the real power to gain a lion's share of the mutual benefit lies: with the power to walk away. If one side can walk away from the table and the other side cannot, the party that can leave can get almost anything they want as long as they leave the other party only slightly better off than if there was no deal at all.

Of course, in a smoothly functioning economy, the vast majority of goods and services exchanged are not subject to deal by deal negotiations. But what can be described by professional negotiators with terms like "the power to walk away" can be described by professional economists as the slant and rigidity of the supply curve or the demand curve. The result is the same on either the micro or macro level. The side with least need for the exchange gets the greatest share of its benefits.

What creates an imbalance in the power to walk away? One situation is need. If one side has to make the exchange, their power to walk away is gone. An example is price gouging, such as when grocers may raise prices in the wake of a disaster. In price gouging situations, the existence of competitors is not a factor. The victim of price gouging may be able to go elsewhere, but all of the suppliers know he has to buy from someone, and soon.

While the victim of price gouging has lost his negotiating power due to temporary need, the job seeker loses his power due to permanent need. For most people, a job is the ultimate need. It from the earnings of job that all other needs are satisfied.

Capital is wealth that is used to help produce more wealth. By definition, capital is not needed by its owner: Wealth that is needed is consumed. Instead of investing in capital, the owner of excess wealth could choose to hoard land and gold, or indulge in ostentatious luxury. But capital is needed by the laborer, for whom it is necessary for the production of the wealth that the laborer needs to live.

Thus, free exchanges between labor and capital make the world a better place, because they all increase value in the world and they all make all participants better off than they were before the exchange. Free exchanges between labor and capital also inevitably result in capital retaining the greatest share of the increased value by exploiting its power to walk away from the exchange.

So how can we make the exchange more fair?

The socialist answer is to abolish the free market in labor and capital, and make the laborers the owners of all the capital they utilize. But this throws the baby out with the bath water. The exploitation of the zero-sum game is ended, but so are the wealth-producing advantages of the positive-sum game. The owners of excess wealth are forbidden from putting it to use in the creation of more wealth, and laborers have no incentive to produce excess wealth, since it cannot be invested. Increased value is never exploited, because there is no increased value.

The conservative answer is to give workers more training to do better or different work. But better training does not change the minimum needs the worker must satisfy to be willing to work. It merely increases the increased value of the labor-capital exchange, all of which can be taken by capital due to their power to walk away.

The liberal answer is to have the government meddle in the labor-capital exchange. The government can regulate the minimum wage, working hours, safe working conditions, etc. The hope is to give labor a more fair share of the increased value from exchanges between labor and capital. The fear is that all of this meddling will make many exchanges too expensive for capital and cause it to walk away, destroying potentially productive exchanges.

Of the above, the liberal answer seems to work best in practice. Usually, the slower growth caused by government meddling is offset by greater growth caused by wealthier masses who can consume more products. However, periodic slowdowns and adjustments in the level of meddling are common.

There is another way. The need for government meddling could end if the balance of negotiating power between labor and capital were equalized. Currently, the imbalance exists because capital can walk away, but labor cannot.

A basic income for all citizens would give labor the power to walk away. A population that does not have to work will benefit more from the work they do. With a basic income, those who receive job offers will be able to seriously consider whether they would rather spend more time with their families. The employers will know this and adjust their offers accordingly.

A basic income could bring true economic freedom to the market. A worker whose needs are met and who can negotiate a fair deal on his own may regard government meddling on his behalf as a paternalistic interference against his ability to choose the job he wants. The decision about whether a job offered at a subminimum wage is exploitative or a great opportunity could be made by the person with the best ability to know, the worker who can walk away from the exploitation.

A basic income could thus help unshackle the free market from policies now needed to protect labor. The positive sum power of exchanges in the free market could be unleashed, and a minimum wage would be unnecessary, because labor could receive its fair share of the benefits.

Timothy Roscoe Carter was born in Roanoke, VA, and grew up there and Greensboro, N.C., where he attended the University of North Carolina at Greensboro. A member of the Libertarian Party in college, he moved to San Francisco and got his first real job with the IRS. Thinking he would rather help people avoid paying taxes, he left the IRS and went to Golden Gate Law School where he earned a J.D. and an M.S.(Tax). While in law school, he met Francisca Oropeza, whom he married after she wizened up and left law school to become a therapist. After becoming a lawyer, Tim decided that he did not want to work for the rich after all, and joined Bay Area Legal Aid in the welfare benefits unit, specializing in Social Security and SSI law. He is currently a member of the USBIG network, advocating a basic income in the hopes of eventually eliminating the need for his job. He and Francisca have two children, Isaac and Aaron.

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