Monday, May 25, 2015

On the Minimum Wage

The city of Los Angeles, CA recently raised the minimum wage to $15/hour. Last week, McDonald's employees laid siege on the company's headquarters in Illinois to demand higher wages. Both of these events are part of a larger push in the US to raise minimum wages to what backers call 'living wages' - wages at which a family can expect to actually live. While to those on the left and indeed even centrists, this might sound like a no-brainer, I recently spoke to someone who characterized the issue well, and from a more nuanced perspective.

The real question is - if there is a mismatch between market-determined cost of living and market-determined wages, what is the source of that mismatch? Classical economics tells us that there are simply too many workers chasing too few jobs, but given that US unemployment is recovering well for the last couple of years and that McDonald's wages (as an illustration) have not changed much either before or after the Great Recession, this classical explanation seems inadequate. My friend explored another plausible solution - a demand-supply mismatch in terms of skills.

All jobs are not equal, some pay more than others. At least in theory, higher-skilled jobs attract higher wages. With all due respect to clerks at McDonald's, their job is unskilled and therefore, they are quite literally at the bottom of the food chain. A demand to equate unskilled labor with skilled work through legislation will only create a new mismatch that will ultimately kill jobs, as has already happened in Japan, where robots are taking over an unthinkable variety of jobs, including serving customers at restaurants.

However, we cannot let families starve - that comes with the social contract. So what do we do? The only reasonable solution is to increase access to higher education that brings employable skills, somethings that Illinois Gov. Bruce Rauner won his election on. This will involve higher education budgets, which is obviously difficult to achieve without cuts somewhere. This must be two-pronged: a reduction in the massive administrative overheads that eat up university and community college budgets with little benefit; and a reduction in state spending in programs that do not impart job-ready skills. Of course, the liberal left will call this an assault on the university system, but attacking ideas with rhetoric is not going to solve a very real problem. 

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