Walmart has decided to raise its starting wage to $14 per hour. This seems contrary to conventional wisdom, as firms strive to minimize labor costs. Walmart may appear to be the proverbial white knight in this scenario. By the end of 2023, less than ten states will have minimum wage requirements that exceed Walmarts starting wage. In the context of a Bootleggers and Baptist (1983), is Walmart the Baptist? Is Walmart meeting Progressive politicians and the American public (51 % support a $15/hr. minimum wage) halfway? By offering slightly less than what the left-wing populists want, are they providing voluntary compromise?
Not so fast. On a superficial level, Progressive politicians would be the Baptists for championing the moral concern of the quality of life experienced by low-skill workers. It is important to note that their normative position does not account for the potential negative consequences of raising the minimum wage. Walmart is most likely not enacting this new corporate policy out of the kindness of its own heart. It is important to remember the insights made by Adam Smith (the butcher, the baker, and the brewer) in The Wealth of Nations (1776), business is not charity, Walmart executives need to act in the interests of the firm to survive in the marketplace. Walmart might be upping wages to retain employees, which would be the best-case scenario.
However, there may be a more oblique strategy the firm is circuitously implementing. This is purely speculative and not a conspiratorial claim. The following statements are merely conjecture. If a firm seeks to reduce labor costs; why would the company voluntarily increase wages? Indirectly, such a policy could assist in reducing labor costs. How? Through urging companies to automate operations. The St. Louis Federal Reserve even notes; when the minimum wage increases, the greater the potential for worker displacement.
“… Increasing the minimum wage is a controversial issue. Although a higher minimum wage can provide higher income for low-wage workers, it can also reduce the number of job opportunities for those workers. Some of the reduction in jobs occurs because a higher minimum wage increases production costs, causing firms to shift away from, or stop, production of some goods…”
While the public would be disgusted by this realization, reviling such business tactics ignores the role of incentives in decision-making. If you were a Walmart executive, you would take the same measures to reduce operational costs.
Do not let the hollow promises of populist ideology fool you! Populism of the right or left is antithetical to the individual liberty cherished in Classical Liberalism and Libertarian philosophy. For one, populism frames policy in collectivistic terms rather than individualism. Populism tends to advocate for policies that support Positive rights (a right to an economic good, e.g. Social Security) over Negative rights to protect the individual from interference with exercising their rights (free speech). Much of what populists advocate for is the retribution of wealth and market privilege instead of individual freedom. Policies such as Single-Payer Healthcare and tariffs impose costs on all voters. This is because populism holds the interests of the group; without unanimous consent. Sure, by choosing to live within a certain jurisdiction you may be tacitly consenting to the laws. However, the rise in populism has spurred an increased demand for state intervention to provide more economic privileges. The problem is that the preferences of the “average voter” cannot be known, as every voter has their own opinions and preferences (p.20). Ordinary voters are not unitary actor, but many individuals with different political proclivities; populism assumes too much about what is best for all of society (p.16).
It is not just the threat of majoritarian tyranny that makes populism perilous to liberty, but populism also requires conferring more authority to the state. This may seem ironic with all the “drain the swamp” rhetoric of the Trump presidency. Even in applying rudimentary logic, more collectivism requires a more centralized authority to be enforced and implemented. The unified will of the people is not recognizable; it takes the personified form of a “strongman” leader embodying the general will (p.20). They generally shift towards autocratic regimes (p.20) since implementing and justifying factually flawed and illiberal policies necessitates large sums of political authority. Beyond the threats of authoritarianism, the elites still benefit from waves of populism. The elites can hide behind the fluid nature of populism and allow majoritarian sentiment to shape crony policies that benefit narrow interests (p.171-172). For example, the supervillain of retail Walmart’s (not the author’s opinion, but a commonly held belief)CEO publicly stated the minimum wage was too low. Raising the minimum wage has been a longstanding talking point of the populist left. In true Bootlegger and Baptist (1983) fashion, Walmart stands to gain. Why? Because a higher minimum wage means more automation and fewer salaries. The bonus is that not only will the firm gain monetary from saving money while maintaining the veneer of having concern for those in the lower income brackets.
The best explanation for the recent tide of populist sentiment is the self-propelling dynamics of the social desirability bias and irrational rationality. The social desirability bias in psychology is when survey participants shape their responses to make themselves look better. Elected leaders portraying themselves as champions of the people can conform their campaign promises to what makes them more appealing to voters. As candidates that consistently miss the mark on the opinions of their voters don’t stay in office long(p.21)! Even middle-of-the-road elected officials drift away from the median to keep their heads above water in political waves of populism (p.4). The unmoored and amorphous qualities of populism; make it flexible to the changing tastes of the public. The malleable nature of populism makes a “thin ideology” (p.171) that political opportunists can easily manipulate. By definition, a populist candidate must pander to the interests of regular people, regardless of how detrimental the consequences are. Hence, populist candidates typically support raising the minimum wage and import tariffs; superficially, these policies sound beneficial. There is ample evidence that bothsuggestions do more harm than good. Most of the “majoritarian” solutions to economic issues are predicated on emotional appeals rather than solid facts.
Professor Bryan Caplan’s Rational Irrationality not only dovetails today the social desirability bias in populist politics but forms a symbiotic mechanism for perpetuating these policies. Rational Irrationality is when voters have intense biases and disregard evidence contrary to their strong beliefs. The reason for illogical rationalization is that as long as the individual costs are low (per Alex Tabarrok political decision-making lowers the individual costs of policy). Caplan surmises that there is a demand for irrationality in the political process (p.7), as the voter will barely notice the costs of the policies they favor, providing clarity on why we people support bad policies. However, this can cause voters to adopt disastrous policies (p.152). Through tailoring attractive policies that lean into the concerns and biases of the typical voter, populist candidates can win the approval of their prospective constituents, generating a synergistic feedback loop of detrimental interventionism in the economy and other spheres of life.
The advocates of worker rights have always been in a precarious position; reforms often do not align with the interests of employers. This is an enduring pattern that supporters of California Assembly Bill 275 need to consider. Most initiatives for economic equality tend to be more moralistic than practical and do not account for how firms will respond to such measures. Depending on how establishments defined in the bill as Fast-Food Restaurants (only the larger companies with 100 + stores) adjust to the requirements set by AB 275.
The law aims to establish a governor-appointed council (comprised of workers, union representatives, etc.) that reviews and amends workplace standards and wages. Even boasting a requirement where any measures would need signatures from 10,000 (consent of the governed?) fast food workers employed in California to move forward. On the surface, this new bill sounds like it will provide reforms that will improve the lives of millions of workers struggling to make ends meet on a low salary. However, the lofty aspirations of AB 275 may have the exact opposite effect.
When analyzed from the framework of Bruce Yandle’s Bootleggers & Baptists (1983) theory of coalitions, it is easy to see the fast-food workers as the proverbial Bootleggers. But such an assumption is flat-out erroneous; the hourly employees at the local Jack In The Box are the ones who will pay the price for this new labor reform.
Prima Facie, it sounds like the hourly fast-food employees of California make out like bandits. The prospect of escaping penury wages and making $22/hour. Then there is the bonus of having a voice in shaping the regulation that will impact your work life. These benefits will be short-lived; because the titans of the drive-thru will eventually respond to the monetary and transaction costs of fulfilling these new legal mandates. Few (if any) companies in any sector of business can whether a significant increase in labor costs ( there is a potential for labor costs to increase by 60 %). Depending on how large the increase in worker compensation becomes, menu prices stand to increase by 22 %. (p.7). Some may speculate that firms such as Mcdonald’s would benefit from passing along labor costs to the consumers at higher prices; there is a strong likelihood that patrons may just opt for cheaper or higher quality alternatives. There is also an increase in transaction costs because of the additional layers of complexity added to the relations between the management of franchise owners and hourly employees. AB 275 may discourage smaller regional fast-casual restaurants from expanding to avoid the onerous conditions of this new law.
Ultimately, our Bootleggers, the established fast-food eateries will gain from decreased labor costs. How? These firms will decide to automate operations and benefit from long terms savings in not having to pay salaries and benefits or cope with the loss in productivity from theft or employee absence. Only increasing the minimum wage is enough to drive many firms to reduce costs. Creating a price floor is a price control that causes disruption throughout the market. Because businesses will attempt to avoid the artificial increase in labor costs. For the workers that are lucky enough to keep their jobs, certain nonmonetary forms of compensation disappear (p.10-11); no more free coffee in the breakroom.
“By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?”
The Trump era will forever be distinguished by its notable shift away from free trade economic policies. Generating a resurgence passionate resurgence in the advocacy of protectionism. This rhetoric was salient even in the nascent period of the Trump phenomenon, dating back to his iconoclastic speeches on the campaign trail in 2015. Championing a quasi-neo-mercantilism that challenged the decades-long conventional wisdom of the Republican Party. This prevalent truism being that liberalized trade is a core component of any sound economic platform. Taking into account the modest reforms we saw under the Regan Administration. The wave of neoliberal trade policy continued through the 1990s with the bipartisan support of the NAFTA bill. It seemed as if the trend towards globalized trade was seemingly unstoppable. Until right-wing populism swept the United States indicating a change in public perception of moderately unfettered international free trade.
The Trumpian position on international trade dates back to the years of the NAFTA bill of the 1990s. Vocal high-profile opponents of the bill included columnist and former Presidential aide Pat Buchanan and Ross Perot. Expressing concern over the outsourcing of production and its direct impact on the American economy. Mainly, all of the U.S. workers have been displaced by outsourcing jobs to foreign countries. From a prima facie standpoint, this argument seems sound. However, after closer examination, it becomes quite clear that economically it is profoundly flawed. There is a moral dimension embedded in this argument because people do suffer from losing their jobs. The unfortunate economic vicissitudes of the American Rust Beltcan be speculated to have been greatly impacted by the outsourcing of domestic labor.
On a deeper level, most of the variable causing the shift towards foreign production of goods has been engendered by faulty economic policies. Economic behavior is guided by the unwavering laws of economic exchange. Analogous to the laws of physics they cannot be indefinitely contradicted without serious repercussions. Since each economic agent acts in their self-interest they respond accordingly to government initiatives and laws that violate these immutable laws and informal laws guiding commerce. Domestic regulations laws governing minimum wage, production, transportation, and taxation become so onerous that firms become incentivized to move to manufacture abroad. While policies such as minimum wage laws are billed as means of improving the quality of life for low-skilled workers, it tends to have the opposite effect. Such measures only serve to benefit a few while harming many through increasing the unemployment rate. Raising the price floor for labor will impact profitability that leaves employers with a difficult choice. Either cut labor expenses through automation, outsourcing and working with a skeleton crew or succumb to bankruptcy.
Driving the shift to off-shore production is the comparative advantage that many countries have over the United States when it comes to manufacturing and other services. Classical economists such as Adam Smith and David Ricardo believed that it was more advantageous for each economic unit (whether it be an individual worker, firm, or national economy) to focus on the goods and services they produced most efficiently. In a sense comparative advantage logically extends the anything else that can be obtained through various trading partners. For example, it is well known that Adam Smith was a big fan of Claret wine, a beverage fermented in France. The soil in Scotland is not generally unsuited to winemaking, therefore it would not be sensible to produce Claret in the United Kingdom. But Scotland does have climate amendable to the production of some of the world’s finest Single Malt whiskies.
The comparative advantage that countries such as China as over the United States are lower labor costs and fewer regulations. Due to measures such as minimum wage laws operating as price controls (functioning as a price floor), they are bound to create disruptions in the labor market. Tempting producers to take actions such as outsourcing jobs to curtail losses. A sensible reaction to policies that effectively undermine the core purpose of prices. That purpose is to serve as a quantifiable signal that communicates the market supply and demand of a commodity. Suppliers and producers need to respond to the inflated value of labor accordingly to stay solvent. That unfortunately requires workers to be laid off and to find more affordable labor alternatives. To quote Milton Friedman manipulating prices is never a “free lunch”! The disutility of mandating a higher minimum is evident not only from the qualitative reason of human nature but also in quantifiable data. While estimates suggest that raising the national minimum wage to $15/hr would lift 900,000 Americans out of poverty. Simultaneously, such a change would also be projected to put 34 million Americans out of work. Demonstrating how the costs of raising the national price floor outweigh the minor benefits.
From a superficial standpoint, it is easy to label the competition of foreign as being the taproot of our economic woes. It makes for wonderfully succinct bumper sticker slogans that are catchy and fun to chant at rallies and protests. The protectionist approach of blaming others for our economic problems ignores the inherent issues with our domestic policies. Its restrictive regulations and high corporate tax rates drive businesses to go abroad. There was a lot of social currency in placing the blame on other countries for our inefficiencies in production during the Trump years. These admonishments of free trade are predicated upon economic fallacies and illusory thinking. For a politician, it is easier to play the blame game than to encourage innovation to stay competitive. It is also much quicker to mobilize crowds through economically illiterate bluster than to tell them to take control of their destiny.
The renewed interest in raising the federal minimum wage is gaining steam as a hotly contested debate. Especially considering President Biden is inserting a $15 an hour minimum wage requirement in his latest Coronavirus relief bill. There are many proponents on both sides of the issue. Many advocates of a higher minimum wage claim the moral high ground on the issue, considering the rate has not kept up with inflation. Suggesting that raising it to $15 per hour would aid those working in low paid professions with being able to afford the bare necessities. Some even boldly advocating for a pricing floor of $24 per hour as being an adequate minimum wage.
However, is it economically sound to raise the minimum wage to even $15 per hour? Over the past couple of years, several papers have suggested so, but their interpretation of the data did suffer from some misconceptions. If we underwent an extremely rudimentary cost/benefit analysis of raising the pricing floor for labor we would see that it is a detrimental policy. A recent study found that raising it to $15 an hour would lift approximately 900,000 people out of poverty. As many advocates enthusiastically indicate as being evidence that this would be a good policy. Per the 2020 U.S. Census, it is estimated that 34 million people were living in poverty in 2019. Making 900,000 only a drop in the bucket in terms of battling the social issue of poverty. What the pro-raise the minimum wage camp neglects to inform us of that the same study they cite also estimates that 1.4 million people would also stand to lose their jobs! Making it reasonable to question whether raising the minimum wage would truly benefit the poor members of society.
The resurgence of the minimum wage debate mirrors the arguments for imposing pricing ceilings on in-demand goods during the beginning of the COVD-19 pandemic. Why? Because minimum wage laws and price gouging laws both operate as forms of price controls. Generally, these policies are implemented to insulate the consumer or work from “exploitation”. Either being paid inadequate wages or having to pay exorbitant prices for commodities during a time of crisis. However, prices are the key market signal that bridges the information asymmetries between consumer and supplier. Prices are contingent upon the supply of a product or service and the level of demand. Hinging on one of the most basic and universally known economic laws. Despite the good intentions of the activists pushing for an elevated minimum wage they are doing more harm than good. By mandating by law that the minimum wage needs to be at a certain dollar amount it immediately creates distortions in the labor market.
In an abstract sense, the worker is selling their time, services, and human capital when they agree to accept a job offer. In the job market, the corporations and small businesses looking for workers are the consumers. The job seekers are the ones supplying the labor. High wages alert prospective job seekers were the most lucrative job opportunities are which generally require less common skills. Directing the job seekers to make the appropriate investments in human capital. Implicitly detailing which degrees, certificate programs, and other forms of job training are required to stand out in the job market. Workers with little in the way of skills command a lower starting wage. Compensation is based on a worker’s productive output capacity. If a worker has few skills their productivity would be relatively lower from an economic standpoint. When the minimum wage is raised there is an imminent risk of displacing low-skill workers. If a fast-food worker is only producing $9 an hour worth of productive output and the minimum wage is raised to $15 an hour the business owner stands to take the loss. Then he may decide to cut corners and operate with fewer people, compromised product quality, or automatic the process. The threat of automation is real. Several studies have found that driving the price floor for labor up results in increased automation of operations. It is clear that the distortion of prices in the labor market could lead to displacing more low skill workers. The result being more low skill workers harmed than helped. Some income better than no income at all?
Inverted logic 