Wednesday, May 4, 2011

How high should the wage hike be?

Political organization, or more precisely, mob intimidation, cannot change the laws of economics but only make it harder for employers to keep their business running. Raising wages will in the long run reduce job opportunities and increase the price of consumer goods. The poor stand more to lose since they are on fixed income and spend a large portion of it on consumer goods. Notice also that it is always the employers who are at fault while the government itself, which is the source of the problem, is never questioned

I have already argued in a previous article that wages are primarily determined by productivity and not by the discretion of the employer. Generosity or good faith of the employer has very little to do with it. If the laborers get wages which are higher than what all of them can produce, then the employer will either have to pass the additional labor costs to the consumer in the form of higher prices or file bankruptcy.

The minimum wage laws also have glaring contradictions. The labor code allows for exceptions. Physically and mentally impaired individuals as well as apprentices and learners can be paid at least 75% of the minimum wage. Firms employing less than ten workers are exempt from paying minimum wages. If you ask why certain exceptions are made, the answer will be based on economics. But then that only defeats the purpose of the minimum wage law in seeking to reverse the laws of economics. If we must defer to economics in the case of the physically disabled workers, why not defer to economics when it comes to workers in general? After all, economics applies at all times and in all places.

Arguments against minimum wage laws are not only theoretical, as prices of consumer goods increase every time a wage hike is ordered by the Philippine government.

Some don't buy into the argument that businesses would close if minimum wage rates were increased. They charge hypocrisy on business owners who take their families on expensive vacations while not giving workers enough to eat. This is of course an exaggerated claim. If a worker's wage is not enough for him to eat, then why is he still working in that same job in the first place? It is ridiculous to claim that workers don't have enough to eat when a lot of them already support many children with that meager wage, but that is a topic for another discussion. Just because an employer is rich doesn't mean he must pay wages at more than the worker's productivity level. The employer could have gotten the vacation money from saved profits in the past. Why should the employer use those saved profits to subsidize a business which is made unprofitable by the minimum wage? Why should the employer enter into an employment agreement where he has nothing to gain? It really redounds to an advocacy of the Marxist exploitation theory, whether or not people are aware of it. Pro-labor advocates think that profits are undeserved because it is taken from labor's 'full value'. Fortunately, Marxist fallacies have been refuted by economists of Marx's own generation.

To those who think labor has a right to a share in profits, I quote from

"Why are the laborers who demand a share in the capitalist's profits, silent in demanding their "share" when he incurs losses? Why don't they cry out and demand that they get to receive a share in those losses? If labor is the sole cause of all profit, then is it not also the sole cause of all losses? A moments reflection will point out that laborers are only responsible for their job description -- they are not directly responsible for the losses of a business -- and that the cause of an enterprise's losses lies essentially with the owner, as do the profits."

Then there's the bargaining power argument. There are more workers than work, they say, and the workers have to accept lower than productivity wages because the employer can just hire somebody equally desperate for a job. The premise of this claim is palpably false as it does not recognize the primordial fact of scarcity, which is the whole basis for the study of economics. There is always going to be jobs available because humans have unlimited desires and limited means to meet those desires. Bargaining power is actually dependent on productivity. The greater the gap between a worker's productivity level and his wage, the greater the risk that that worker will be hired by a firm offering a higher wage. Competition among employers bids up the price of labor to the point where it approximates productivity levels. If one disdains the difference in 'bargaining power' between employers and employees, then one must place the blame on anti-competitive government interventions such as permits, regulations and anti-trust laws.

The laws of economics cannot be changed by passing legislation. The only way to deal with the primordial fact of scarcity is through entrepreneurial discovery of more efficient ways of allocating resources. This means allowing the price mechanism to work and the profit and loss system that follows it. In hard times such as these, we need markets more than ever.

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