Minimum wage: heck, let’s make it $20/hour

There are those who advocate for raising the minimum wage in order to improve life for those on the bottom end of the wage scale. While this sounds compassionate at first, as I have described in For the Love of Alberta, this is utterly misguided.

There is no injustice in somebody earning less than somebody else; the only injustice is if somebody is earning less than they should earn for the work they are doing.

The logic supporting minimum wage increases has been captured fairly well in a recent Maclean’s article on the subject. Much is made of the comparison between minimum wage and median wage. In other words, justice is measured by comparing my paycheck to the paycheck of the guy next to me. This is an utterly meaningless comparison all by itself, and does not determine whether my paycheck is fair and reasonable unless the relative value of my work is also compared to the relative value of the work done by the guy next to me.

Let’s do some simple math. Suppose I’m only earning $10/hour washing dishes in a restaurant and my friend is earning $20/hour waiting tables in the same restaurant. That’s quite the gap. My friend is earning twice as much as I am. Perhaps another mutual friend earns $30/hour as a manager of the restaurant.

[I don’t work in the restaurant industry so these numbers might be ridiculous. Just follow the line of thinking, not the specific numbers.]

And, for the sake of argument, let’s assume an average meal at the restaurant costs $25.

Now let’s suppose that minimum wage is raised to $15/hour. Do you think my friend is going to continue earning $20/hour as a waiter if I’m earning $15/hour washing dishes? Hardly. And do you think the manager is going to continue earning $30/hour as a manager given the minimum wage increase? Again, not likely.

If I get a lousy $5/hour raise by waiting tables instead of washing dishes, then maybe the lower stress associated with washing dishes outweighs the meager gains in compensation. I’d rather wash dishes and accept a pay cut. If we make the example more extreme, would you rather earn $20/hour delivering newspapers in a quiet suburban neighbourhood, or $21/hour fighting raging forest fires in Northern Alberta? The extra $1/hour simply isn’t worth the risk, is it? Forest fire fighters are doing a much more difficult job than newspaper deliverers, and the compensation they earn needs to reflect the kind of work they are doing.

The value of the job you are doing is a package bundle of a number of factors:

  • How hard is your job?
  • How much training is required?
  • How many other people know how to do your job?
  • How much experience is needed to do your job?
  • How much is at risk if you mess up your job?
  • Is your job dangerous?
  • Is your job the kind of job that people really hate doing?

And so on.

Washing dishes is the kind of job that requires very little training, very little experience, is not dangerous, and very little is at risk if you mess up your job. This is why airline pilots, forest fire fighters, brain surgeons and many others will always earn far more than dish washers. Even a waiter will earn more than a dish washer because not everybody is cut out to wait on customers. Honestly, I’d suck at it.

Being a manager is far more difficult than either washing dishes or waiting on tables. If a dish washer messes up their job then somebody gets a slightly dirty dish. No problem, I’ll get go back to the kitchen and get a clean one; no major loss. If a waiter messes up their job somebody might get the wrong order. That’s a bit more costly, and could upset the customer, but it’s still relatively easy to correct.

If the manager messes up their job then the restaurant might run out of food for the evening, having to turn away many paying customers. That could mean dire consequences for a lot of people. If the manager screws that up often enough, customers will go elsewhere and the continued operation of the restaurant (and all the jobs that go with it) might be in jeopardy. Being a manager requires a lot more experience, specialized training, and so on, relative to washing dishes. And substantially more is at risk in the role of a manager than that of a dish washer. All of that means a manager’s job is relatively more valuable than a dish washer’s job and the manager’s compensation will accordingly be proportionally larger than a dish washer’s.

So if the dish washer is earning $10/hour then a manager ought to earn about 3X that amount, or $30/hour. With that much training, experience, and with that much at stake if they mess up, the wage needs to be relatively higher because the value they add is that much higher.

If the minimum wage is increased from $10/hour to $15/hour then the manager’s wage should also increase from $30/hour to $45/hour. Not right away, of course, but eventually. With time the market will naturally sort these things out. But the scenario where the dish washer is earning $15/hour and the manager earns $30/hour is not sustainable for the simple reason that a manager’s job is 3X as valuable as that of a dish washers.

If there is any injustice, it would be if the manager’s salary stayed fixed while the dish washer’s salary went up. That would be unfair. Compensation justice is achieved when the relative value of a person’s contribution to society correlates properly with the relative compensation that person receives for their contribution. In other words, if the dish washer is earning 1/3 the compensation of the manager (in this hypothetical example) then such compensation is just.

So suppose minimum wage is increased and the market does what the market always naturally does; adjust. These factors will be at work not only in the restaurant industry, but in all industries. Those who supply food to the restaurant will all get paid more. Those who transport the food and supplies to the restaurant will all get paid more. Those who do the marketing for the restaurant will get paid more. The accountants, the lawyers; they all get pay raises eventually.

With all of those costs going up, what will happen to the price of a decent dinner at the restaurant? It will inevitably go up. It has to go up or the restaurant will go under. So that dinner that used to cost $25 will now cost, say, $35 – $40.

So when the dish washer was earning $10/hour in order to buy a $25 dinner, he will now earn $15/hour but the cost of the dinner just went up as well.

Net benefit? Nada. Zilch. Zero.

Not only his dinner, but his groceries, his taxes, fuel, clothing, mortgage; it all adjusts over time. It has to adjust because money is correlated to value. The dollar figure is actually completely arbitrary; it merely measures the relative value of one good or service relative to other goods and services. If you pay the dish washer $10/hour then the waiter will get $20/hour. If you pay the dish washer $15/hour then the waiter will get $30/hour.

That’s why I say, let’s go for $20/hour minimum wage. Then the waiter will get $40/hour and the price of a decent meal will be about $50.

Heck, let’s get really ambitious and just add a zero. The dish washer could earn a whopping $100/hour! Just imagine it! What a raise. Except then the waiter earns $200/hour and the price of a decent meal just went up to $250. And the manager goes home with $300/hour; not bad!

Or, just for fun, why not mandate that the minimum wage is whatever a brain surgeon earns. I think most people would do well earning six-figure salaries, right? Happily ever after?

What could possibly go wrong?

Of course reality is not so perfectly linear as I’ve presented it, and the time to adjust isn’t immediate so there may actually be a small advantage while the market slowly makes the inevitable adjustments. But the principle remains. Specific dollar amounts are actually arbitrary and government imposed minimum wages do not change the relative compensation of one job compared to the next (not in the long run, anyway) because their relative compensation is a function of their relative value. No legislation could ever change that.

If people really want to earn more than minimum wage they need to do it the old-fashioned way. Get better training. Get work experience. Specialize. Pursue more difficult jobs. Demonstrate your responsibility so you can open doors to jobs where more is at stake if you mess up. All of these factors contribute to a net increase in the size of your paycheck that will meaningfully increase relative to the overall costs of living.

But don’t ask the government to mandate that your employer bump your paycheck because that’s really not going to fix anything in the long run.

Here’s an article by a restaurant owner (of all things – I read this after writing most of this article) outlining precisely this reality. Just to prove that I’m not making this stuff up. But in his article he actually runs through some of the real numbers instead of just making up hypothetical values like I did. But his conclusion – you’ll notice – is virtually identical to mine.

And, if you are interested, I describe this subject in greater detail in For the Love of Alberta.