Recently, fast food workers across America have been striking for higher pay, to include a “living wage”. Complaints have been that a fast food worker can’t afford to raise a family on slightly above minimum wage. Better yet, congress has held hearings over the last few weeks about the possibility of raising the national minimum wage to upwards of $15 an hour. Elizabeth Warren (D) of Massachusetts even asked a panel of restaurant managers and owners why not pay their workers $22 an hour?
Lets first understand just how wages are set. Unlike Ricardo’s “Labor Theory of Price”, Karl Marx (1818-1883) went a step further by claiming that the value of a commodity can be objectively measured by the amount of labor that went into producing it. This is better known as the “Labor Theory of Value.” David Ricardo (1772-1823), building on Adam Smith before him, theorized that prices are set in accordance to the amount of labor that went into producing them. Both are similar and both are wrong. Both are incorporated into Keynesian economics.
In an earlier article, “The Batmobile, Value and Prices”, we discussed the reality of subjective value and the price mechanism. We won’t go into detail in this writing about subjective value, marginal utility and prices, but I would suggest reading that article to gain an understanding that prices are a reflection of subjective value and not labor or input costs. After all, pearls are not valuable because men dive for them. Men dive for pearls because they are valuable.
Carl Menger (1840-1921) in 1871, wrote in his ground breaking book, “Principles of Economics”,
There is no necessary and direct connection between the value of a good and whether, or in what quantities, labour and other goods of higher order (production goods) were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men since large quantities of labour or other economic goods were not applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labour is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command…The quantities of labour or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value. (Wiki)
What Menger concluded was that prices reflected what a consumer was willing to pay for a commodity (the market clearing price) and not what labor went into producing it. Input costs (processes of production) must be adequately adjusted as to ensure that the market clearing price can be realized for any entrepreneur’s product. If prices are set to high, then the product will not sell and the entrepreneur will go broke. If set to low, then profits will not be realized, the costs of the stages of production cannot be covered and production will cease. Both scenarios leads to unemployment and an over all loss of wealth.
Wages are determined simply by a worker’s marginal productive value. That is, the amount a worker can contribute to an employer’s profit gains. In theory, the more production a worker can contribute, the higher the wages. An example would be the wages between a laborer who uses a shovel and the operator of a bulldozer. Although the worker who breaks his back all day with a shovel, in physical terms, is working harder, the heavy equipment operator is earning higher wages because his labor value his greater. He is more valuable to the employer. He is getting more done in less time. He is adding more to the profit margin of the employer and thus is covering more of the production cost. Fairly, he is paid more in return.
This is a positive for the laborer with his shovel and society as a whole. This gives the incentive for the shovel operator to better his skills and become a heavy equipment operator. This added productive value adds to over all wealth as time and capital are better utilized. We all have more consumer goods at lower cost because of ever increasing productive value of workers and cost cutting production innovations. Henry Ford’s assembly line allowed for him to pay the highest wages in the industry as costs were kept down and productivity was high. Untrue is the leftist myth that Ford paid higher wages so that his workers could purchase the cars that they produced. Henry Ford was not a Marxist but a capitalist.
Automation: The Ultimate Cost Cutter
So how does all of this apply to our line workers at McDonald’s? Since we agree that it wouldn’t be advantages for McDonald’s to charge above what people are willing to spend (market clearing price) for a Big Mac or Happy Meal, an adjustment would have to be made. Consider a typical lunch shift at a fast food restaurant consists of about eight to ten workers all earning at or above minimum wage. The average four hour cost for the shift would be approximately $320 at $8 per hour. If wages were elevated to $15 an hour, the cost would rise to $600 for the four hour shift. That’s almost double the labor cost.
Suppose that the fast food industry caved in to the ignorant public outrage at these lower wages and paid their workers $15 an hour. What would happen next? Probably something like what happened to gas pump operators at gas stations. They are a rare sight anymore. Gasoline vendors, in order to maintain a market price level, replaced gas pumpers and opted for automated fuel pumps and now the consumer does the labor. This phenomenon is growing at the grocery store with self-check out lanes. The video rental business, Red Box has done this with automated kiosks placed at strategic locations. Goodbye brick and mortar video stores. Gone, would be the ten person lunch shift at the burger joint. Instead, the shift may include two workers and a manager. The self-serve soft drink machine has already proven to be more cost effective than the time for an employee to pour up soft drinks all day. The burger machine is next.
Supply and Demand
Just as with all things in an economy, the law of supply and demand still apply to labor. When demand is low and supply is high, the price goes down. When demand is high due to a lack of supply, the price goes up. There is no lack of supply of none skilled labor in America. Honestly, it’s in super abundance. Those fast food employees who demand $15 an hour will price themselves out of a job. The bulldozer operator example above still applies. Two employees operating a burger and french fry machine are more productive than a whole shift of lower skill employees putting burgers together by hand. They may still earn $15 an hour but the other eight workers will be unemployed. Understand, McDonalds, Burger King, Wendy’s and Hardees are not employment agencies or community charities. They are businesses and operate on a profit motive to stay in business.
I cringe at every congressional discussion of raising the minimum wage. This means more unemployment for low skilled workers. Mainly teens and students. Those workers who have yet to acquire any labor skills. They have no human capital to demand a higher wage. With every increase in the minimum wage is another rung knocked out from the economic ladder for young adults. It is becoming increasingly harder for young, low skilled workers to find employment. To get that foot in the door and acquire those skills that provide upward mobility.
Elizabeth Warren shouldn’t be asking why congress can’t raise the minimum wage to $22 an hour. Rather, how many unemployed young adults is a tolerable number for her to still get re-elected. This same economic ignorance is rampant in western culture. The inability to graduate young adults from public schools with the critical thinking skills required to get ahead is a travesty. Instead, the population is brimming with brain-washed Marxist exploitation theorists. Opinions of capitalism and free markets have never been at a lower point in history. The very economic system that gave them Ipads, personal computers and endless technological advances is somehow to blame for all of their woes.
Without a clear understanding of basic economics and an eradication of Marxism from the public psyche there can be no economic recovery. With countless government interventions and the impending doom and monstrosity known as Obamacare, any return to “normalcy” can be forgotten. Soon, educating the public into the dangers of socialism and State intervention will be as easy as saying, “Look around you.”