The problem with the “Living Wage”

2017 January 24
by Daniel Lakeland

Stuck on the basic idea that everyone works and buys their stuff through the money they make by wages, naive everyday Socialists often advocate for what they see as a solution: The Living Wage (AKA “a decent minimum wage”)

This number changes through time of course, but recently it’s been assumed to be about $15/hr here in California.

What is the problem with minimum wages? They don’t alter the mathematical properties of the system in the right way to achieve a stable equilibrium.

What is needed to avoid the race to dystopia is for people’s consumption in a given year to be $$C = B + Wt$$ where B > 0 is the basic income, $$W$$ is some wage per hour and $$t$$ is some amount of labor supplied in that year in terms of hours worked.

With that system in place, as the price $$P$$ of a basket of goods falls due to efficiency and automation. The amount of goods each person consumes is $$\frac{B}{P} + \frac{W}{P}t$$. And, even if the amount of labor you put in is $$t=0$$ because it’s cheaper to just make stuff without having people involved, as $$P$$ goes to 0, you still consume a larger and larger amount of stuff $$B/P$$.

The problem with the “Living Wage” is that it changes the equation to $$C = W_L t$$ and so the amount of stuff you consume is $$W_Lt/P$$ and if $$t=0$$ constantly as P decreases, the whole thing is zero and stays zero. No amount of increasing $$W_L$$ can help because as $$W_L$$ increases, the attractiveness of replacing people with automation increases and the amount of work $$t$$ demanded by employers will decrease even faster. It’s pretty obvious that if you want to put all of the US out of work, you’d simply pass a law requiring a minimum wage of $350 Million/yr and until the rioting fixed it, no-one would work at all.

In fact, we don’t currently have a situation where we can accomplish everything without having anyone work, but we do have decreasing need for many types of labor, and if we could set a $$B$$ big enough today, you would be able to survive, perhaps uncomfortably or poorly at first, but survive on $$t=0$$, and so there is no immediate human demand to increase $$W$$ above what would otherwise be a market price for each type of work (ie. people don’t riot in the streets demanding to have the government force employers to hire them at $15/hr to do stuff that only makes the employer $5/hr or whatever).

People can then work at whatever wage prevails in the market without fear of starving to death over the next few weeks. They can only go up from $$B$$ and they can go up to whatever extent they can find in the market. The wage in the market reflects the value that the employer perceives for the work, and the higher wage jobs attract people to learn the skills that actually have value to society. Wages continue to serve their critical information-aggregation role, a role they don’t play when employers are forced to hire people at wages that don’t reflect the value of the work.

As the cost of providing goods falls due to automation, offshoring, whatever, eventually people enjoy enough cheap goods on their equal basic income $$B$$ so that giving up time to earn meager wages seems unattractive. Why bother to earn wages when you get $1000/mo basic income and thanks to automated robots building things and running farms, that’s enough for everyone in the country to live in a mansion, have a non-polluting flying car to travel around on vacation with, and eat caviar?

In the long term limit where producing things falls to extremely low cost, everyone lives the high life off a constant basic income except those people who have some kind of special skill that can’t be automated, and they sell some small amount of labor and get even better lives than the very comfortable lives lived at income $$B$$.

Furthermore, to the extent that people have a desire for more, they will learn skills that can’t be automated, or spend their time discovering ways to automate new things that they want produced. They focus their attention on the most productive place, the one where natural market wages are high. The main way that people would “earn wages” is by discovering ways to tell their robots to produce new types of stuff that no-one had thought of before. We see this already in 3D printing communities and the Free Software movement. If everyone who used a copy of the Linux kernel had to pay Linus $180 or something, we’d all be poorer off, because the marginal cost of producing a copy of the Linux Kernel is as close to zero as dammit. But even though many people get absolutely NO money from contributing to the Linux Kernel, lots of people provide patches and add new features, because they themselves get to “eat” that value they created.

The living wage is the wrong solution to a real, serious problem, the problem of changing a linear function $$C = Wt$$ into an affine function $$C=Wt + B$$.

In the long run, we just need any old B as prices for goods will fall as cost of production falls. In the short term, we do need to think carefully about how to set B. But the big jump is the jump in understanding we need from the population. It needs to be OK for people to get some constant amount of income each month so that we can continue to find ways to automate things and cut the costs of producing goods and cut the amount of human labor we need to consume. Eventually, no one should have to breath welding fumes, operate a bandsaw, or sit in front of a computer all day processing airline reservations. If we can figure out how to automate the process of creative research in Biochemistry too… then all the better.


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