The following are some disorganized thoughts I’ve had regarding the recent wave of minimum wage discourse. They are not well-researched and are highly opinionated. To the extent that anything I’ve written here is factually incorrect, I invite you to send me an email. If you simply disagree with the subjective content, email me all the same. :)
After gradutating from college, several friends and I began looking for an apartment together. As it turns out, finding a place to live in New York City that has five bedrooms, is within the budget of five recent graduates, and satisfies five different sets of preferences is not an easy task, but after an extensive search we finally settled on a place in midtown.
The only caveat was that this apartment didn’t technically have five bedrooms. One of us would have to live in the living room (which, miraculously had an actual door), and one would have to live in what was, at one point, the apartment’s servant’s quarters. It did have its own bathroom, but it was small, awkwardly shaped, and contained the apartment’s laundry machine and dryer.
Needless to say, there were large disparities between every “bedroom” that made it impossible to divide rent evenly without someone feeling stiffed, so we had to come up with a system to split rent fairly.
Enter the New York Times. Based on a paper by Harvey Mudd math professor Francis Su, the Times developed a fair rent division calculator. The calculator proceeds almost as a game: it goes through each resident, proposing a rent division for each room and asking them which room they would choose at these prices. Slowly, the algorithm learns which rooms are the most (and least) desirable, and adjusts the rent division accordingly.
If a few modest assumptions are satisfied, the process promises to find a solution which is “envy-free,” that is, when the final rents and residents are assigned to each room, no one resident would rather switch to another room at the assigned prices. This important property ensures that nobody feels like someone else is getting a better deal than they themselves are.
While the result is mathematically satisfying, it does lead to some interesting psycological consequences. Throughout the process, some of my roommates expressed that a proposed division wasn’t fair because roommate X’s rent for room Y “too low.” Envy-free divisions present an easy response to such assertions, though: “wanna trade?”. Every time this objection arose, the objector declined to make the trade. The rent that was supposedly too low was not, it seemed, low enough to entice the objector to snap up a great bargain—they were happier where they were.
In other words, the determination that roommate X’s rent was “too low” was based on assumptions about what they and every one else should value by the determination of the objector, with the convenient exclusion, of couse, of the objector themselves.
Joe Biden’s coronavirus stimulus package that was unveiled this week includes, among other things, a proposal to raise the federal minimum wage to $15 an hour. The proposed dramatic increase has led to another round of minimum wage discourse across the internet, with no shortage of people weighing in on what they think a fast food worker, waiter, or other service worker “deserves” to earn for their labor. There’s a not-insignificant portion of the population who vehimently maintain that this so-called “unskilled” labor is not worth $15 per hour.
It’s always struck me that these attacks on a higher minimum wage suffer from a severe lack of people putting their money where their mouth is, so to speak. I highly doubt that most people who claim a $15 hourly wage is too high for fast food workers would willingly work the job for $45 per hour, let alone $15. For whom, then, is the wage “too high”?
One defense of a $15 minimum hourly wage that I read attempted to assuage the concerns of workers already earning $15 per hour who would suddenly find themselves being paid the same as so-called “unskilled” laborers. This defense touted the increased leverage that such workers would have if they were able to tell their boss “give me a raise or I’ll go get the same wage at Arby’s.”
Leverage is, in my experience, all too often left out of lay-discussions surrounding minimum wage, and even the labor market at large. However, the minimum wage treats only a symptom of the fundamental issue with a large portion of the labor market: there exists a dizzying leverage imbalance in favor of employers that dramatically suppresses wages, and raising the minimum wage alone cannot correct for the disparity.
When the pandemic disrupted the global workforce early in 2020, many tech companies were well-positioned to have their employees pivot to an all-remote workflow. Some of the biggest names in Silicon Valley quickly announced that employees would not be expected to return to headquarters until mid-2021, or ever. Some employees, disillusioned with exploding rents and homogenous culture, took this opportunity to entertain fantasies of an escape from the Bay Area to buy a large estate in the middle of the country at a fraction of the price of a modest townhouse in San Francisco.
Some executives, though, quickly put a damper on these dreams. Facebook warned employees that those who relocated would potentially face adjustments to their salaries come January 2021. A spokesperson called this “a market-based approach to compensation,” and emphasized that it had always been common practice—it was just more visible now due to the large number of employees wanting to work remotely for an extended period.
In discussions online about Facebook and other companies’ decisions to adjust compensation based on location, some commenters were baffled. If employees were doing the same work for the same employer, how could their labor suddenly be worth only, say, 60% of what it was before? The answer, of course, is that employees have never been paid based solely on what their labor is “worth” (i.e., the actual value produced by the labor). In a salary negotiation between an employee and an employer, the employer wants to pay the employee the lowest wage at which they will actually perform the job. The employee, on the other hand, wants to be paid the highest wage at which the employer will still want to hire them. The space between these two numbers, if the latter is higher than the former, is the set of possible outcomes from a salary negotiation.
Assuming perfect rationality, the actual worth of the employee’s labor sets the ceiling on the negotiation, since an employer would not hire an employee at a wage higher than the value the employee produces. But the lower end of the “acceptable range” is determined by the employee’s ability and propensity to walk away from an unacceptable offer. If an employee has, say, an offer from another company that pays 10% more, they have incredibly good leverage for securing a raise: if their employer refuses, the employee can put in their two weeks and accept the alternative offer.
On the other hand, an employee without a competing offer has comparatively weak leverage. If their employer denies them a raise, they could quit and search for a new job, but that’s risky for the employee and so it’s a safer bet for the employer that the employee will begrugingly accept the decision and move on.
When an employee moves to a new job market, their leverage changes. Their next best alternatives to their current employment are no longer part of the same market as the employer. Instead, the employer is only competing against companies willing to hire a remote employee (which are much fewer in number) and companies in the employees local market. If the local companies offer lower pay, then the employer can reduce the employees salary without fear that they will leave for another job. “Cost of living” offers a neat justification for the salary adjustment, but it really comes down to negotiating power.
How much would you pay each day to have something to eat? Not how much you currently budget for, or how much you’d ideally like to pay, but assuming someone has held the world’s food supply hostage and is demanding your last, best offer for them to provide you with a regular food supply.
The answer for most people is likely “everything I can spare.” After all, the decision here is life-or-death. A malicious actor could extract every last cent from you if they held the keys to your food. The same goes for water, housing, and (to a certain extent) healthcare. It’s nearly impossible to put any kind of reasonable price on these because people would willingly give up everything else in order to secure them.
For many people, all of these life-sustaining essentials are directly tied to their continued employment. One missed paycheck could mean eviction, starvation, lapsed prescriptions, or death. What sort of leverage does an employee in such a position have? Effectively, none. Employees will be forced to accept any wage which allows them to scrape together enough to survive, even if it means working multiple jobs, skipping meals, and accepting severe mistreatment. It does not matter what the value of the employee’s labor is, because that only sets the ceiling on the acceptable range, and the employee is always forced to the floor.
So what, then, makes so-called “skilled” labor pay so much better? As a tech employee, it would be difficult for me to be more of a cliche than I already am. I grew up in Silicon Valley, raised by parents who worked in tech themselves. I learned to program as a hobby throughout grade school, and came into college (paid for by my parents) already having several years of experience in computer science. I took internships each summer and secured a well-paying job before I even graduated. My experience is not at all atypical of the millions of employees entering the so-called “skilled” work force every year.
But these employees are not commanding higher pay because their labor is more valuable. No, it is because overwhelmingly, they have much better leverage. If I had turned down an offer before graduation, the downside for me was not catastrophic. Previous internships meant that I had not-insignificant savings to bridge any employment gap that arose. Parent-funded education meant that I had no significant debt to worry about urgently. Familial wealth meant that even in the worst case I could move back home and live on my parents’ dime for the forseeable future.
In other words, I had a safety net that empowered me to turn down any job offer I deemed to be unacceptable, and the vast majority of my peers were in the same position.
“Skilled” labor is paid better not because the labor itself is more valuable but because the positions are traditionally filled by people from privileged backgrounds with safety nets, i.e., people who can afford to walk away. Furthermore, having a critical mass of high-leverage employees lifts the entire industry. It’s simply not tenable at large to pay one engineer minimum wage while another makes six figures (though, as the racial pay gap indicates, the effect is not entirely erased by industry trends).
In industries with a critical mass of low-leverage employees (so-called “unskilled” labor), the situation is entirely different. Employees cannot afford to walk away, and so instead must discount their labor by an amount equivalent to their desire not to starve, become homeless, etc. An employer can extract every bit of surplus wage from an employee, right up until the point that the job itself becomes more of a threat to the employee’s life (e.g., because of physical danger or mental health impact) than the lack of any income at all. And as a result, the employee is left with no extra money that they could use to break out of the cycle in the future—they cannot save, cannot generate familial wealth, and may have to take on debt just to survive.
The result for the bulk of society is, yes, lower prices. But the prices are lower because employers are exploiting people’s fundamental vulnerability in ways that would be criminal if it weren’t one step removed. If employers were physically withholding food, shelter, and medical care from their employees, it would not be controversial to say “hey, maybe things shouldn’t be like this.”
The solution to the fundamental issue here is not a higher minimum wage. There is some logic to the now well-worn response to a minimum wage hike, “if you raise the minimum wage then employers will have to fire people to stay within budget.” The labor market is not immune to the laws of supply and demand, so demand will of course be reduced some if prices increase.
I won’t dissect this objection at length other than to say it’s not a clear-cut argument gainst minimum wage hikes. But the only reason it’s an argument against minimum wage hikes at all is for the same reason that so-called “unskilled” labor pays less to begin with: vast portions of the labor market depend on jobs for survival.
If we, as a society, provided a comprehensive social safety net, there would be no reason for pearl-clutching about layoffs and job automation. If housing, food, and healthcare were a matter of right, it would no longer be a death risk to lose one’s job. A higher minimum wage is undoubtedly a step in the right direction, but it does nothing to help those who are being exploited regardless of wage (e.g., those who are being verbally or physically abused) nor does it help people who are unable to hold stable employment (e.g., because of medical conditions or disabilities).
Let’s strive for an economy that is not built on the backs of workers who are negotiating with a gun to their head. Wouldn’t you feel better knowing that nothing you buy has depended on the laborers that are only working under threat of death?