Friday, December 06, 2013

abolish the minimum wage

The U.S. Secretary of Labor Thomas E. Perez wants to raise the minimum wage.

In fact, the vast majority of Americans -- 91 percent of Democrats, but also 76 percent of Independents and even 58 percent of Republicans -- are in favor of raising the minimum wage.

This is an understandable position. After all, the gap between richest and poorest has grown very wide in recent years. But in my view, minimum wage laws are not good laws at all. That’s not out of lack of compassion for low-wage earners, or because I like inequality. That is because I think that there is a better way to achieve a decent standard of living for the poorest in society.

The minimum wage is a factor in creating unemployment. Despite what's often said to the contrary, it's true: Countries with no minimum wage tend to have much lower unemployment. Right now, America is suffering a serious deficit of jobs, with over three jobseekers for every available job. We need all the jobs we can get.

So how does the minimum wage create unemployment? Minimum wage laws are a price control. They dictate the minimum level that a company can pay a worker. If the minimum wage is $10, and a company wants to take on a new employee that they determine will be worth $8 an hour, they have a choice -- either pay $10 an hour, or not hire the employee. Sometimes, the company will accept a hit to their profit margin, and pay the employee $10 an hour.

Sometimes they will just not hire a new employee at all. Or, increasingly, sometimes they will go overseas and hire an employee elsewhere -- like China -- where wages are far lower. This is a particularly cruel scenario because it discriminates most against the poorest and youngest workers in society.

Empirically, the minimum wage has failed to reach its goal of ensuring a fair wage for low wage workers. Worker productivity in America has risen and risen, yet the minimum wage has not.

I propose abolishing the minimum wage, and replacing it with a basic income policy, a version of which was first advocated in America by Thomas Paine. Individuals would be able to work for whatever wage they can secure, meaning that low-skilled individuals -- especially the young, who currently face a particularly high rate of employment -- would have an easier time finding work. And the level of basic income could be tied to the level of productivity, to reduce inequality.

There are two kinds of basic income policy. The first is a negative income tax -- if an individual’s income level falls beneath a certain threshold (say, $1,500 a month) the government makes up the difference. Funds for this could be accessed by consolidating existing welfare programs like state-run pension schemes and unemployment benefits, and by closing tax loopholes and raising taxes on corporate profits and high-income earners. Germany has enacted a similar policy -- called the"Kurzabeit" -- and it's been credited with shielding the German labor force from the worst of the recession and keeping their unemployment rate low since.

The second is a universal income policy, where everyone receives a payment irrespective of their income. This would obviously require more funds -- meaning higher taxes -- but in a future where corporations are making larger and larger profits while requiring fewer and fewer workers due to automation, such policies may become increasingly feasible. There are already very serious proposals to initiate such a scheme in Switzerland.

*** [12/18/13 Cramer on the minimum wage]

When I first broke in at Goldman Sachs (GS +2.55%) in the early 1980s, I was in charge of tabulating turnover in what was then known as the Securities Sales Department. It was my job to keep track of who stayed and who went, and to be sure I knew the details of each departure. I was told that, historically, Goldman Sachs tried hard not to lose anyone it wanted to keep, even as it was willing to see the others depart -- and, for the time when I did the tallying, the division's record was perfect on that score.

When I was first assigned the project, I had no idea why it was so important to keep track of how few people actually left the firm, other than for boasting rights vs. the competition, which always seemed to be losing people left and right.

But once I was in the fold, I realized the reason Goldman closely observed this number had to do with the tremendous cost of training people, and how departures -- any departures, of good people -- meant a total loss on an important human-capital investment.

In the division in which I worked, Goldman Sachs aspired for zero turnover because the firm spent, on average, six months teaching associates how to do their job -- and, during that period, these trainees were dead-weight losses to the firm. Trainees were sunk costs; you couldn't afford to lose the good ones. It could really hurt your firm's P&L, or profit and loss statement.

Few issues could be more bedeviling to profitability than turnover, and Goldman Sachs did everything it could to discourage it, including paying people more, teaching people better and offering them more benefits than you could get elsewhere.

It worked. The firm was by far the most lucrative investment house on Wall Street then, and to a large extent it still is now, perhaps because it maintains an excellence in training.

Now fast-forward to Tuesday's interview with John Mackey and Walter Robb, co-CEOs of Whole Foods (WFM +0.44%), at the opening of their Brooklyn store.

Both execs spoke intently and intensely about how turnover is the bane of their existence because it hurts all stakeholders, the remaining associates and managers left behind, the customers and the shareholders. In their opinion, paying people much more than the minimum wage, while offering them some of the best perks and benefits in the retail world, has led to a remarkable cost advantage -- not disadvantage -- vs. many retailers, where the goal seems to be to squeeze as much out of their workers as possible. Mackey and Robb know there's a big cost to the firm when people leave. They know that turnover is a killer to the bottom line.



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