Why raising the minimum wage won’t make prices go up

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Every week we come across bosses arguing that that “can’t afford” a pay rise for their workers. Right wing economists and commentators also argue against an increase in the minimum wage because it will only lead to a rise in prices and therefore cancel out any temporary gain.

Sometimes even workers or labour-friendly economists repeat the same tune when discussing whether it is a good idea to raise the minimum wage.

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I want to use the experience of the fast food industry to explore the truth of these claims. Recently, I travelled to the US to be part of an international fast food workers meeting. We discovered that there was little relationship between wages and prices in the industry when comparing different countries.

The highest paid workers were from Denmark. They are paid the equivalent of $US21 per hour and have a guaranteed 40-hour week. In the US, most workers were on the legal minimum of $7.25, or just above. Yet the “Big Mac” in both countries costs about the same.

I travelled to China a few years ago and found out that a Starbucks coffee costs the same (or even a bit more) than in NZ, yet the workers were paid the equivalent of $NZ5 a day – and that’s a ten-hour day.

For some obscure reason, Pizza Hut pizza’s are considered a bit of a middle-class item of conspicuous consumption. They cost at least $NZ20 each in a restaurant.

A major flaw in the argument against increasing wages is that it assumes that businesses have not already set prices for their commodities to maximise their profits. Those prices, as we see in China, often have little do with the price of labour.

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The converse has also been true in New Zealand where real wages for most workers were pushed down savagely during the late 1980s and early 1990s without the overall price levels falling. The end result was a massive boost to corporate profits and a decline in the wages share of Gross Domestic Product.

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Why that happens is explained well in an article published in Liberation News in the US.

“The fact is that businesses strive at all times to maximise its rate of profit so as to ensure survival against the competition. The main exception to this rule is when business owners calculate that temporarily lowering prices will gain a bigger share of the market—perhaps driving out competitors—after which they can raise their prices back up sufficiently to compensate for any short-term loss.

“The rate of profit, of course, varies from business to business and over time. But competition and the market tend to push the individual rate towards an overall average. If profits rise above that average, capital tends to flow into that area of the economy—businesses expand or new ones open up—which raises production and supply relative to demand, pushing prices and the rate of profit back down. The obverse happens if falling prices cause the rate of profit to sink below the average. In that case, capital flows out of that sector of the economy lowering production and supply relative to demand, pushing prices and the rate of profit back up.

“Now, if the workers through mass struggle win a higher minimum wage, the result will likely be to lower the rate of profit of the employers affected, though it can also increase their business, since low-wage workers will have more money to spend. But assuming that on balance their rate of profit does fall, the affected businesses may very well attempt to recoup by raising their prices, just as the right wing economists argues.

“However, if prior to the increase in the minimum wage these businesses had already set their prices to maximise profits, prices cannot then be raised following the minimum wage increase—assuming competition and market demand remain unchanged—without causing a fall in demand relative to supply and a further fall in the rate of profit. What will happen instead if the rate of profit remains depressed, and if it is below the average rate of profit, is that capital will flow out of that sector of the economy, pushing supply down relative to demand and prices up, boosting the rate of profit back to the average.

“The outflow of capital can, of course, take the form of businesses contracting, or in some cases closing down altogether, resulting in workers losing their jobs. However, it is likely that the increased demand resulting from the rise in the minimum wage, which to some extent will also push up other wages—for example, managers’ wages at fast-food restaurants—will enable their competitors and other businesses to expand and hire more workers, increasing job openings elsewhere.

“Various studies have shown that in general, there is no overall loss of jobs as a result of wage increases. Therefore, the net result of wage increases is that more money ends up in the pockets and bank accounts of the workers, on one hand, and a somewhat lowered individual and average rate of profit for the capitalists, on the other. That is a desirable outcome in view of the fact that today, many low-wage workers depend not only on their paychecks to live but also on tax-payer-funded food stamps to have enough to eat and Medicaid and/or emergency rooms for their health care—in effect a subsidy for the capitalists.”

In New Zealand, the form of the wage subsidy for the capitalists is the tax and benefit system known as Working For Families. It provides subsidies to working families with children. We also have a landlord subsidy in the form of the Accommodation Supplement. A radical increase in the minimum wage to the level of the “Living Wage” (currently estimated as $18.80 per hour) would allow us to eliminate or at least significantly reduce these subsidies for the capitalists while simultaneously attacking radically the inequality that exists in society.

9 COMMENTS

  1. Great article.

    An added difficulty when trying to boost wages in New Zealand is the number of nominally ‘self employed’, often actually dependent contractors, and small businesses.

    A combination of strong unions with the right to strike and pro worker legislation is needed.

  2. Yes excellent thanks Mike Treen.

    It is horrible the way bosses are expecting the government to subsidise their proclivity for paying insufficient wages.

    It is great if governments provide subsidies for innovative industries that further society as a whole, like clean tech however this approach should not be allowed to occur across the board as is the case now.

  3. Quite humoress actually…neo liberalism needs a tax and benefit system to bring about its optimum.

    On negotiating low wages…if a business cannot afford to pay its workers a living wage ..it will come down to one of two questions :

    A) Is this business doing so poorly that the employer cannot afford to pay a decent wage/hourly rate?

    If so,..under the merciless tenets of neo liberalism that business doesn’t deserve to exist.

    Or is it rather that the employer is such a poor entrepreneur or lacks sufficient marketing skills and such a Luddite fiscally they refuse to invest in capitol to develop the business..?

    When that employer discloses the poor wage/ hourly rate he/she proposes to pay you…a simple question can be ‘Why such low pay?…is this business doing poorly?’

    B) Employer avarice or greed …self explanatory , really…echoes of Dickens’s London. 19th century coal mines and the like.

    We start to see the error in neo liberal ideology when a business cannot stand on its own two feet and has to rely on a Working for Families top up system to either avoid paying workers more or to prop up a business that does not deserve to continue to exist.

    So…the bottom line is this : Neo liberalism needs a welfare system to bolster its own ‘too big to fail ideology’,moreover..that Working for Families top up comes from another worker further down the road at another business to subsidize another business’s employees on the same street.

    How cozy.

    This then extricates the original employer from any further obligation to dig a little deeper into their pockets and pay workers a proper, decent wage they can live on.

    In the old days we would call this welfare or subsidies..these days we call it capitalism – depending on which side of the employer /employee fence you are on.

    Therefore , welcome to the new age of welfare post Employment Contracts Act/Employment Relations ACT..whereby beneficiaries are not those in dire financial straits through unemployment but are in fact businesses that continue to exist through subsidies by working taxpayers ,protected by legislation to do as such , and continue to do thusly year after year with impunity.

    Welcome to the age of the corporate business bludger.

  4. Thank you, Mike Treen, for a very thoughtful and interesting analysis.

    ” . . . . temporarily lowering prices will gain a bigger share of the market . . . driving out competitors—after which they can raise their prices back up . . . to compensate for any short-term loss”

    And that is PRECISELY what we can expect to happen when NZ signs up to the Government Procurement Act and/or the Pan Pacific Free Trade Agreement and/or the Trade in services Agreement. All of these are USA-initiated con-jobs that – once adopted – will result in money flowing out of NZ and into the pockets of the big USA corporates.

    The Multinationals can easily afford to temporarily cut prices to the point where the local NZ product cannot compete – thus forcing the local competitors out of business. Fair competitition, on a level playing field, you can bet your bottom dollar, will be the LAST thing on their minds.

    Key has just returned from ‘lil ol’ America with his wish-list of a seat on the UN Security Council. Whats the betting thay Obama conned him into signing up for one or the other of the above three agreements in exchange for US support for the Security council bid?

  5. Consider the ridiculously low price of printers compared to the exorbitantly high price of the ink cartridges for said printers. If it were true that wages are the only factor in pricing decisions, those lucky sods making the ink cartridges would be being paid a king’s ransom while the less fortunate serfs making printers would be on starvation wages.

  6. Perhaps workers would be happier , more content therefore less likely to demand higher wages and able to function if those same right wing fuckers hadn’t sold our public services like electricity to off-shore parasites looking to make a quick buck out of poor Kiwi people having to live in their winter jackets in doors in winter or go hungry lest they default on their mortgages .
    We Kiwis have been brainwashed into compliance . We’ve been rendered feeble minded and are seemingly powerless to act against our abusers .
    Our compliance is made all the worse because those cunning jonky lovers have as painted into a debt corner . Hefty power prices are a great way to control working class people and those others on pathetic wages and rising costs .
    I say FUCK them ! I say we make fucking sure they know we’ve had enough . I say we take back that which is ours . Every time you talk to some power company rep , make he / she know you’re pissed off , write to your MP and tell them you’re pissed off . Those complacent , lazy , greedy pompous politicians won’t be going cold or hungry , they believe they are entitled to your money what’s more and are confident they’re immune to being taken to task . Lets show them another side to the Kiwi spirit . Lets take our discomfort to them ! Lets give them our discomfort . I say fuck higher wages , that’s what they want us to demand . Indeed , the know we’ll demand that . I say , lets demand our stuff and things back first . Then lets see about higher wages . To recap . I think demanding higher wages while we know the Corporations , banks and a bias-in-favour-of-the-lazy-rich Tax System can reach into our pockets and take our potentially higher rates of pay away is arse about face . It’s as if they win after we do all the work .
    I say ” Fuck the Paint ! Walk over the floor and kick some arse !
    Watch this . If you dare . Based on actual events . I met the Director and I have respect for the man .

    We are being head fucked Ladies and Gentlemen . Boys and Girls . Pets and creatures .

    http://en.wikipedia.org/wiki/Compliance_%28film%29

    • Best comment, interesting/terrifying reading and demonstration of a real example of the Milgram experiment. Since when did being kind and considerate and not thinking of every single thing we do in terms of dollars and cents, yen or baht, euros, roubles, rupiah etc etc become law?
      If our politicians and rulers had the smallest amount of humanity they would be making quick smart moves to instigate an universal basic minimum income; to delay this brings us closer and closer to a point of no return for humanity, I feel.

  7. I disagree with the point that if an employer cannot afford to pay an increased wage that means the business is doing poorly.
    There are some employers/business owners (perhaps a few would be a better term) who run at very low margins in the belief that the service they provide and the price they can provide it at is of importance also.
    Whilst I would love to be able to pay a living wage it is not feasible to do so. If this was made law then our prices would go up, thereby taking away the more affordable service we provide.

    • Dan,
      Everyone loves a bargain- as a certain Red Shed keeps reminding us- but surely it’s more important for employees to have a living wage. I can’t be alone in being happy to pay a little more if the person serving me is being well paid. I may not even have to pay more for, as the spending power of others is improved, sales may also increase along with profits.

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