Minimum wage increases vs. alternative uses

One of the common, if often unstated assumptions behind support for higher minimum wages is that businesses can absorb the extra costs just fine. They are making $X/hr off employees currently, and they will simply chug along making $X-increase after the new policy goes into effect.

In general, businesses operate on thinner profit margins than most people realize, but assume this argument is correct. My first bosses, the owners of the Dairy Queen franchise where I worked when I was fifteen, made a pretty decent living. If that was, say, $100,000/year, dropping it down to $90,000/year or even $75,000/year wasn’t going to kill them. (I don’t really have a clue what they took home, but nice round numbers make better examples.) It might have meant something substantial to them, but it wasn’t the difference between the high life and the bread line.

What this common take ignores is that my bosses didn’t have to operate a Dairy Queen franchise to make money. Lionel Robbins defined economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses”, perhaps not a perfect definition but one that’s good enough for present purposes. My bosses’ time and energy were scarce means which had alternative uses. They could have operated a Dairy Queen, or they could have done something else. Artifically raising the costs to employ us would have made other uses of their time relatively more attractive. I suppose some owners and stockholders are committed to doing the specific thing their businesses do, but more often than not they want to make money, especially in the case of stockholders who buy and sell shares all the time. My bosses certainly didn’t have any special love for producing delicious ice cream treats.

The fact that my bosses probably could have absorbed some extra costs does not mean they would have absorbed extra costs, not when they had other ways to make money. I can already hear the internal dialogue: “It’s said that people are only motivated by greed.” I don’t agree with that statement, but it’s beside the point. Responsible policy is made for the people you have, not the people you wish you had.

This line of reasoning is completely natural to economists, but not to everybody else, and I wish the public dialogue on this topic pointed it out better.

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Author: rfmcelroyiii

Student and instructor of economics.

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