Saturday, June 21, 2008

Minimum Wage

Last year, amid some controversy, Congress passed an increase to the national minimum wage. There was the usual nonsensical political gamesmanship of course, but also something interesting. For the first time, American Samoa was included under the US minimum wage law. Until that point, their minimum wage had been determined by a Labor Department committee with significant input from local elected officials and business leaders. Every two years the wage was revisited and adjusted if called for by local conditions.

American Samoa's congressional representative, Eni Faleomavaega, argued that by raising the island's minimum wage Congress was ruining its economy. You see, much of the population is employed by the tuna industry, and should labor costs rise exponentially, those factories will shut down. An industry spokeswoman agreed with Representative Faleomavaega, as did a Department of Labor study. Sadly, no one in Congress paid attention.

What was so interesting about this whole episode were the economic principles on display. American Samoa's economy is far different than California's, and for decades they had been able to set their own wages according to their unique needs. But, isn't Utah's economy different than California's as well? In fact, doesn't Utah have varying mini-economies within its own borders? Then why shouldn't we be allowed to set our own wages?

As we ponder what happened to the American manufacturing industry, and why we call India for tech support, and wonder why our jobs were shipped overseas, maybe we should take a closer look at American Samoa. It appears there is an economics class being taught there in real life.


Charles D said...

Wages do not exist in a vacuum. The sufficiency of a particular wage is relative to the buying power of that wage in the local economy. For example, if I make $5.85/hour and a loaf of bread costs $1.30 then I make 4.5 loaves per hour. If bread goes to $2.00 and my wages stay the same, I can only buy 2.92 loaves for each hour I work.

I am not an expert of American Samoa, but it seems to me that wages should permit a worker anywhere in the world to buy the same amount of ordinary human needs (food/housing/transporation) as a US worker doing the same function. Similarly it is wrong to pay a worker in Manhattan the same wage as a worker in rural Mississippi for the same work.

Cameron said...

Do you disagree with a national minimum wage then?

Charles D said...

No I do not. We need to realize that businesses, especially large ones, exist to maximize profit. While that can be beneficial to the nation, if that company's workers are unable to feed, house, and clothe their families on the wages they receive, that cancels out the benefit of the profit.

While state minimum wage laws would be more responsive to the economic realities, the political reality is that many states simply would not enact meaningful minimum wage legislation. The federal government should set a floor wage that would provide a worker in most states with a minimally adequate living. States with a higher cost of living should enact rates above that floor.

Cameron said...

But the floor imposed is likely to cause business to leave. It's an artificial wage, one which cannot be supported by the local economy - especially since the businesses can move to another country where there isn't an artificial wage.

In the attempt to pay people a "living wage" we are actually contributing to them losing their jobs.

And as I look around and see manufacturing gone, and jobs being sent overseas I can't help but think payroll plays a big part in that.

Charles D said...

Businesses will not take their jobs to another country if that will increase the cost of producing goods. It is possible to impose a tariff on goods imported from overseas that were produced by the same company here.

The living wage movement has had little effect on the number of jobs in America. Corporations have moved their jobs overseas because the government has supported so-called free trade agreements that made it much more profitable to build things elsewhere.

We now have an economy in which the richest 1% hold wealth greater than the bottom 90%. That is more like a banana republic than an American dream. We don't need consumer goods so cheap that average Americans can afford them, we need wages high enough to allow the average American to buy products made in the USA.

Cameron said...

Ah, but one of the tuna companies employing the people of American Samoa is not a US owned company. They simply operate here because the economic situation is right. They can, and will, leave once the situation changes.

As for your tariff idea, doesn't that just make the goods more expensive? So now we've artificially inflated prices as well as wages.

Moreover, wouldn't removing competition through tariffs hamper or even stifle innovation by domestic companies? For instance, it was the influx of better, safer, more fuel efficient foreign vehicles that forced American car manufacturers to improve.

Also, if we put tariffs on imports, won't our exports receive the same treatment?

Bottom line, doesn't the American Samoa situation teach us all something very important about the nature of economics?

Charles D said...

Tariffs are not a panacea, but neither is so-called "free trade". What we need to do is think together as a nation about what industries are vital, what technologies do we need to pump research money into, etc. Tariffs are one tool to protect those vital industries and we can provide tax relief and perhaps subsidies to push research when the market does not do so.

Is the automotive industry vital? I don't think so. The high-paying, high-benefit manufacturing jobs are, so if we lose to foreign competition, it would make sense to look for industrial growth elsewhere so those jobs would not be lost.

I'm not advocating centralized planning of the economy, but certainly we need to think about what directions this nation needs to go to insure a prosperous future for our people and provide encouragement and support for private industry to move in those directions. We also need to think about what systemic barriers exist that make growth more difficult (lack of universal health care, for example) and if the market cannot remove those barriers then government has a responsibility to do so.

The key thing here is that when we turn over all decisions to corporate leaders who are only interested in short-term profits, the results will be increasing wealth inequality, higher prices, lower wages, and socialization of costs whenever possible. We the people need to regain control over the economy and make sure that the market works to our advantage.

Cameron said...

Think together as a nation about what industries are vital? Holy cow man, why not just let the industry sink or swim on its own?

What are the people of American Samoa supposed to do when the plants shut down because you decided that industry just wasn't vital?

Charles D said...

A national industrial policy does not close industries that some politician deems unsuitable, it rewards and fosters industries that have potential to spur long-term economic prosperity. If a business requires government handouts to succeed but is not vital or desirable for the nation's long-term future (like say the nuclear power industry), then that's their problem.

Cameron said...

But that has nothing whatever to do with American Samoa. In fact, it's quite the opposite. It's government intrusion that is causing their industry to fail, which will cause abject poverty of its citizens.

If government hadn't mandated a wage, then we wouldn't be having this problem.

I see a fundamental principle in that.