Recent demands by McDonald’s employees for a living wage has prompted a good deal of debate in the USA and beyond about the concept of a minimum wage. I was drawn into just such a discussion on LinkedIn where most of the contributors were of the opinion that the minimum wage was yet another example of government interfering with the free market and, as such, should be abolished rather than increased. A popular analysis is that a minimum wage has the effect of inflating the cost of living to the extent that any benefits of an increase in the minimum wage are very soon wiped out. It’s hard to argue against such reasoning but the solution proposed by the majority of these analysts is so implausible that it needs to be challenged.

Their argument is that low paid jobs are there to provide people with a start on the employment ladder and anyone who remains in such a job in the long term has only themselves to blame: they should get off their backsides pull up their bootstraps and go and find a better paid job. Many of the proponents of this view tell of their own experience as youngsters who worked for a few dollars an hour while studying for qualifications that led them into better paid work and go on to say that anyone stuck on minimum wage only needs to work harder and smarter to get into a better paid job. This sounds fine in theory but if we apply the remedy to everyone in the US who’s currently on minimum wage it raises some interesting questions that don’t appear to have been considered.

If all of these low paid workers are successful in their move into better paid work who will do all of the low paid jobs like cleaning, farm labouring, production line work, child care, and burger flipping? I got no response to this question when I asked it.

Another consequence of everyone on minimum wage moving up to better paid employment is, where does all the money come from to pay these higher salaries? Assuming that all of the better paid jobs are created by new entrepreneurial activity (rather than displacing people who are already well paid, i.e. the proponents of the solution) the money that’s earned must be additional to the current money supply. The only response that I got to this question was that “…the money comes from increased worker productivity”, which beggars belief. Do these people really think that money appears by magic whenever a baker makes an extra loaf of bread or an insurance salesman sells another policy?

Wherever the money comes from to fund these higher salaries the next question is what effect this increase in the money supply has on the value of the dollar? There was no direct response to this but some of the discussion focused on the popular notion that wages and salaries reflect the “economic value” created by the worker. If we look around us this is obviously nonsense. We can all point to examples of organisations where effective, productive people work alongside (or below) lazy incompetents who make a negative contribution to the productivity of the business. And even when someone is good at their job it is rarely possible to make any accurate assessment of the value of their individual productivity.

In reality, rates of pay are determined by economic geography. If you’re lucky or ambitious enough to end up in a corner of the economy that’s got lots of money sloshing about in it, then you have more chance of being paid lots of money for your day’s work. If your vocation is caring for the elderly or growing high-quality fruit and vegetables then be prepared for a life of relative poverty no matter how hard you work our how productive you are.

Ultimately the minimum wage is self-defeating but suggesting that all those who are on it simply have to pull their socks up and get a better job isn’t a plausible solution. Somebody (currently government) will always have to subsidise the living costs of people who don’t get paid enough for their day’s work (never mind those who are unable to do a day’s work). Peddling the myth that pay rates are directly related to productivity and effort isn’t going to help us find the answer to the problem.