Re: Minium wages, competition and 200 years of success.

[Sanjeev Sabhlok <sabhlok@almaak.usc.edu>]

Dear Utkarsh,

I don't quite agree that we can get economists on both sides of the
minimum wage issue. I would like to hear of any good argument or empirical
evidence on the other side of what I have been advocating. I do know that
a lot of politicians advocate minimum wages, however.

Let us be first of all clear about the intellectual tradition of the West
and compare it with that of Communism. The scientific tradition of the
West sees all human beings as maximizers of their personal benefit (i.e.,
all human beings are essentially greedy and power-hungry, you may say). It
was the West that was so fearful of this greed for individual power (both
political and economic) that they created the institutions of democracy
which we praise and endorse so much. The counterpart of political
democracy in the economic sphere is the perfectly competitive market
system. It creates inequality but prevents any individual from controlling
the decisions of others by force. 

The Communist tradition, on the other hand, imagines that only the
business folk maximize their benefit; the workers are "good, honest folk," 
and do not maximize their benefit. Therefore workers make the best
leaders, both in the business field and in politics. 

Strangely, though, all their leaders turned out to be equally selfish,
greedy, and power-hungry as the ordinary individuals of a Western society. 
But given that there were no constraints of democracy and markets, the
results of this greed were always disastrous. Almost everyone who came
into positions of power, quickly and immediately misused the power - for
personal (not social) benefit. The human nature of the worker was found 
to be a selfish one, as among anyone in the Western world. 

In India, as we know for sure (now, at least, with results of the Bofors
investigation being made public), it was the Nehru dynasty and its
socialistic followers that have grown fat and have shown complete
disrepect for the poor, by forcibly sterlizing them, and impoverishing
them in every way and through provision of corrupt governments at all
levels, from the Prime Minister to the police constable.

When I would like to consider ** any ** issue, therefore, I would like to
do it in the perspective of assumptions. The advocacy of minium wages
reeks of socialistic assumptions, I regret to state. It is assumed here
that our entrepreneurs and business classes are "exploiters" and the
workers are chaste, poor folk who manage to get exploited.

However, it becomes quite clear, on a little thinking, that imposing
restraints on wages prevents entrepreneurs from opening new enterprises,
and prevents banks from lending money since capital costs cannot be
recovered. If the minumum wages are kept quite low (as in the USA), there
is not much of an adverse influence on the economy, particularly when
technological innovation is at a peak. As these minimum wages are
increased artificially, they strangle the process of job creation.

If you were an entrepreneur, you would not open a MacDonalds where you
were forced to pay workers $100 per hour, well beyond what you could earn
from them. You would not open a new enterprise if you were guaranteed a
loss. Therefore only those businesses open, in such conditions, where the
businessman is sure to recover the cost of labor as well as the cost of
capital, and also compensate himself for the enormous market risk of
opening any business at all. 

The argument which makes eminent sense with a $100 per hour wage rate,
can be repeated incrementally down the ladder. There is ** no known **
theoretically establishable rate which can rationally be fixed as a
minimum wage. There is no person in the world who has a Ph.D. in market
interference and knows exactly when and where to interfere with the
market.

The best rate is always the market rate (the one that solves the equation
supply = demand). The entrepreneur is always at our mercy. He or she
survives merely because there is a demand for his or her products. Even
IBM, Apple, and Intel have faced massive layoffs as market demand shifts.
If the market signals that there is great demand in a sector, the wages
automatically rise in that sector to attract more people into that area.
This is the case with computer professionals today. 

I know that many of you on this list perhaps earn more than $100 per hour.
That is not because someone forced your employer to pay you such, but
because the market can support such a wage. You are paid a wage to promote
loyalty, to prevent turnover, etc., given the scarcity in the supply of
computer professionals. The moment the supply increases (e.g., by
educating our millions of illiterate folk), then the wages of computer
professionals also will fall to their equilibrium level. The market is the
only perfect judge of the "right" wage for anyone, not an IAS officer like
me sitting somewhere in the Planning Commission (I at least know some
economics; most IAS officers are blissfully unaware of any knowledge that
will help them "plan" the economy).

It is clear then that the poorest and unskilled laborers are the ones who
are crowded out of organized job markets and into informal sectors such as
drugs and crime, when minimum wages are imposed and markets are
interefered with.  Socialistic and "chartible"  ideas have no place in the
businessplace. 

If one feels very badly about the poor and unskilled people, one needs to
upgrade their skills, and shift their supply to sectors where market
demand is growing. If that is not possible, we need to provide social
security so that their cost is borne by the entire society. It will not do
to penalize a poor small enterprenuer (most of such low level jobs are
created by small enterpreneurs) for the burden of making the unskilled
laborers "richer" than the market will support. That way we kill the hen
(entrepreneur) that lays the golden egg (of jobs).

However, I will support your case for a very low, cosmetic, minimum wage,
on the ground that it "sounds" good for the poor, and that it is very
difficult to persuade people (particularly the rich) that minimum wages do
not improve the welfare of the poor.

I know that the problems in India are severe, and I have been to villages
in Bihar in 1982 when the poor laborer was being paid Rs.2 per day. That
is not going to be cured by minimum wage laws but by (a) massive literacy
and skill-building, (b) opening up the economy to create more jobs in
urban areas [jobs are ** not ** created by public sector; they are
destroyed when public sector is created] and (c) well-planned urbanization
to allow these exploited (by Feudalism) workers to stay till they recover
from this miserable life. 

You will notice that exploitation by Feudal lords is almost entirely
eliminated in urban areas. Instead, we have the exploitation by "Mamas,"
our poorly paid police folk. More on that later. 

Sanjeev

On Thu, 16 Apr 1998, BDP India wrote:

> Sanjeev:
> 
> I think you can get both economists on both sides of the issue. In
> India, even if there is a minimum wage law, it is just impossible to
> implement it. There is no systems in place to track revenues, payrolls
> and a real tax system to have a clear idea of economy itself. Such lack
> of systems has created an huge black economy. Black economy will thrive
> till we do not bring and enforce legislation for businesses to track and
> report their incomes and put severe penalties to uphold the law for
> average citizen. 
> 
> 
> Thanks,
> 
> Utkarsh
> 
> 
> Snippets on high minimum wages and the role of competition.
> >-----------------------------------------------------------
> >
> >From "God is in the Details" By Robert Samuelson, Newsweek 20th April, 98
> >
> >"Europe's high unemployment (10 percent) is no mystery. Generous
> >government benefits reward the jobless for staying idle.  High payroll
> >taxes and minimum wages discourage companies from hiring by raising labor
> >costs... 
> >
> >"The secret of the U.S. economy is that, despite many flaws, its amalgam
> >of incentives still operates constructively. Companies face competitive
> >pressures to improve products and profits; people generally do better by
> >working than loafing; the urge to 'make it' spurs creativity."
> >
> >Lessons for us:
> >
> >a)	Keep minium wages to a low level, if it is necessary to have them
> >	at all.
> >
> >b)	Keep the economy on its toes and globally competitive.
> >	
> >This is the only fool-proof long-term way to succeed. The US has handily
> >beaten India **even after independence** in per capita income growth, and
> >it has kept up this performance over nearly 200 years. How can one argue
> >with such kind of success?
> >	
> >A powerhouse of competition and creativity, is this USA, which has
> >attracted and continues to attract hordes of Indians (most of the people
> >on this list, for instance); people who abandon their dormant and subsidy
> >(beggary)-riddled motherland in favor of the land where you can 'make it'
> >if only you compete hard enough.
> >
> >PS:
> >
> >I notice that some (almost all, surprisingly?!) members on this list are
> >suddenly quiet. Is it that people are not getting these messages, or is it
> >that people think that this list is my "mouth-piece" (false: this is a
> >discussion list; I only got it opened because of the great discussions
> >that were going on earlier; I could continue pouring out my daily ideas
> >into my book which takes much time to write and revise constantly), or is
> >it that everyone agrees to what I am saying, or is it that people are too
> >busy (I get to sleep only an average of 5 hours a day for weeks at a time; 
> >are you guys busier?). 
> >
> >A manifesto cannot be built without participation and debate. I thought we
> >were supposed to tap into each other's brains and come out with points and
> >ideas. So, please become somewhat more active ...
> >
> >
> >
> >
> >
> >
> >
> >
> 
> 
> 
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