“Money is your work in paper form,” my high school history teacher told my class way back in 1987. Then he pulled out his wallet and showed us a piece of green paper. “This ten dollar bill represents about 30 minutes of value that I created by teaching you. It is 30 minutes of my work represented in a piece of paper.” He then explained that by spending the money, he is trading the value of his work for the value of another person’s work.
Years later, I believe his two-minute presentation was one of the most important lessons I learned in high school. He succinctly summed up what is one of the most landmark inventions of civilization: money. Money is all of our work morphed into a purely transferrable form of value. It’s the invention that lets desk jockeys like me – the senior health care policy analysts of the world – contribute to society. Without it, I would face the daily struggle of trying to trade my white papers on health reform for food.
I’m often reminded of this lesson when public discussion turns to raising the federal minimum wage. Through his short talk, my history teacher brilliantly explained a very basic principle of economics that explains why raising the minimum wage can be risky.
You see, the trick to getting paper money to function properly is to make sure that every dollar in circulation represents exactly one dollar’s worth of work. If you print twice as many dollars but don’t work twice as much, the value of each dollar is cut in half. The soda that cost you $1 before you printed the money now costs $2 afterwards. The value of the soda didn’t double, it’s because your dollar is now only worth 50 cents. Likewise, if a person is paid $1 an hour for a dollar’s worth of work, and then is suddenly paid $2 while working the same amount, those two paper dollars are actually only worth $1. This is why sane countries don’t print money to solve economic problems. It leads to inflation and makes their currency worthless.
So assuming a country doesn’t print any more money, the value of each dollar still must remain equal to a dollar’s worth of work. Under these circumstances, giving the worker an extra dollar therefore means the worker must either: 1) produce twice as much in that hour; or 2) be given the dollar from the value produced by somebody else. The first usually means the employee must perform the work of another employee; that other employee loses his job. The second means that somebody must work an hour for free. Usually that’s the employer, who’s unwilling to do so. Instead, the employer takes that hour’s worth of value from the customer in the form of raising prices. That customer is often the employee who just got an extra dollar.
This is why raising the minimum wage has never worked as a solution to poverty. It can’t work unless production is increased, the dollar is taken from somebody else, or government enacts price controls on businesses. There is no way to get around this. You can’t create wealth by increasing the minimum wage any more than you can pour two gallons of water from a one-gallon bucket.
What I write isn’t meant to detract from the need to have a minimum wage. If the minimum wage is not raised every so often, inflation ensures that the poorest workers eventually start receiving less money than the value of what they produce. In fact, a good argument might be made for tying the minimum wage to the inflation rate. I only hope to make people realize that when they discuss raising the minimum wage, that it’s not the paper that makes money valuable. It’s work that makes money valuable.
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The inflation point is probably the best target for minimum wage. However, it doesn’t mean we cant do better, it just means we likely wont do better. Many earn an amount of money that is unnecessary and overvalues their work. Being on the front line of a fast food chain might not require a high level of skill, but it surely has its own challenges. If a business cannot afford to pay a proper wage, maybe they need to examine how they operate. There are a lot of people who are not paid for the value of their work, and a group of people who are being overpaid for the value of their work. What is the solution for that?
This article assumes that people are currently being paid an hourly wage proportional to the work they do. However, this is certainly not the case for many employees, and as a server and Social Work student I can personally attest to the struggle of feeling underpaid for the work I do (or aspire to do when I graduate). Raising the minimum wage is certainly not an end all solution to poverty; however, it would be a start to appropriately rewarding the work that restaurant workers, retail consultants, and millions of other people complete in an hour. Right now, minimum wage is an inaccurate representation of the work they do.
I was going to get into the pay disparity thing, but I felt that doing so was going to send the article off on a tangent. My point was about what money actually is, and to use that point to give a 30,000-foot view as to why caution must be used when thinking that the answer to income disparity is to simply increase the hourly rate.
I agree with you Leah 1000% percent. Lets take for example one of the largest employers of the country Wal-Mart. I read recently that like 4 out of 10 of the richest people in the country are form the WAL -family. Now I don’t have a problem with basic capitalism, but the disparity is ridiculous! And they are making their billions on the backs of the poor. I don’t know the exact numbers, nut I bet that they could give up a small fraction of their personal profits to give the remaining 99.99% of their company a living wage…
Raising the minimum wage boosts consumer spending, generating higher sales revenue for local businesses and promoting economic growth.
Study: Raising the Federal Minimum Wage to $10.10 Would Give Working Families, and the Overall Economy, a Much-Needed Boost. (2013) http://www.raisetheminimumwage.com/pages/job-loss
Summary: An analysis by the Economic Policy Institute shows that the Fair Minimum Wage Act of 2013, which would raise the federal minimum wage to $10.10 per hour and index it to inflation, would generate more than $30 billion in new economic activity and support the creation of 140,000 new full-time jobs as businesses expand to meet increased consumer demand.
Mayor Michael Bloomberg, February 2012, “Raising the minimum wage will put much-needed cash in the pockets of more than 1.2 million New Yorkers, who will spend those extra dollars in local stores.” (http://www.nydailynews.com/sports/new-york-finally-raise-minimum-wage-article-1.1015562)
I’d like to respectfully offer some advice I gained in my political experience about sources. Be careful that the source does not have an agenda. The Economic Policy Institute is not non-partisan, and like the reports of many similar pseudo-research organizations, it starts with the desired result that meets the political agenda, and works back to that result via selective research methods. I could just as easily find an article disputing the minimum wage by the Heritage Foundation.
That aside, vis-à-vis the findings of the report, if raising the minimum wage to $10.10 produces $30 billion in economic activity, why don’t we raise the minimum wage to $20/hour and get twice as much back? If we raised it to about $3000/hour, we could get about $3 trillion in federal taxes back and fully fund the federal budget. (Does any of that logic seem flawed?)
Thank you Matt. Every source has to have some type of bias. Knowledge as it is acquired provides a bias. Whether we find some source to dispute a fact based statement is what is pertinent. If it cannot be tested it is not just a bias it seems, it is a prejudice. (Does that make sense?) There is an optimal level that the minimum wage will raise. It will raise by the actions of the government or it will raise as it is raising now by increasing the amount each of us pays in taxes to support food stamps for people that for instance work for WalMart at wages too low to be above the poverty level and afford food and the necessities of life.
Yes Matt, I do fully agree with you that money is just a representation of energy exchange. I believe as a society we have actually have gotten away too far from that in our day to day life. Not too long ago, it hit me when I was working with my in-laws on the Navajo reservation. Every task for that day was for the basic needs for that day (sometimes a week out) wood gathering, water, herding sheep etc. Point being, your daily work was connected to your needs . The energy was direct and results of thee work were immediate. We have disconnected ourselves as a society and from this which is why I believe there is the disproportion of the value of money. I would probably say that personally , I make more at my job then many other “hard workers” because of social status and constructs and not actual energy exchange.
Matt,
Some of that logic does seem flawed. I haven’t read the study Frank referred to and don’t know if raising the minimum wage to $10.10/hour would produce $30 billion in economic activity. But let’s assume that Frank, well the study he referred to, is right. This would not imply that raising the minimum wage to, “about $3000/hour, we could get about $3 trillion in federal taxes back and fully fund the federal budget.” The reason is that the relationship between the minimum wage and the level of economic activity or the level of tax revenue need not be roughly linear as you seem to be assuming in your response. This relationship could be non-linear or some other kind of complicated function in just such a way that Frank could be right without having to commit himself to the absurd conclusion you seem to want to attribute him. Again, I don’t know if Frank is right. I’m just making a basic mathematical/logical point.
CEO of Oracle, Larry Ellison, makes $74million a year, about $10something a second. Guess his productivity matches his paycheck. Fundamental flaw in your argument, right there.
I request that you please re-read the article, because my point has nothing to do with pay disparities. My point is about what money actually is, and through that point I illustrate some of the issues with raising the minimum wage.
The writer’s perspective, unless I’ve misunderstood something, implies that the value of a dollar depends on how much work has been done to obtain that dollar. It also assumes a complete system of perfectly competitive markets. What this means is that there is a market for every thing that someone is willing to buy and that each market is made up of many sellers/buyers, no buyer/seller is able to affect market price by their behavior alone (so no monopolies or oligopolies), there is free entry into and exit from every market, and all buyers/sellers are fully informed about price and quality of the good being sold. If there is a complete system of perfectly competitive markets, economic theory can be used to prove that people are paid (the value of a dollar) according to how productive they are. This I think is the writer’s point. But if there isn’t such a system, and many economists have shown that there isn’t, then the link between productivity and the value of dollar might be broken.
For example, if employers are small enough in number compared to the number of those looking for jobs (like in a “company town”), employers can get away with paying workers less than their productivity. Economic theory tells us that under these conditions a minimum wage can make the labor market more efficient or, to use the writer’s language, the value of the dollar will increase to the productivity level of workers.
Also, there is a model in economic theory called the efficiency wage model which shows that higher wages, like an increase in the minimum wage, can increase productivity. The mechanism behind this is that with a higher wage the cost of getting fired is higher than before which induces people to work harder. What this means is that the causal relationship between value of dollar and productivity might run opposite to what the writer suggested–value of dollar might cause productivity instead of or in addition to productivity causing value of dollar.
I agree with the writer, though, that a minimum wage can’t solve poverty. Poor people who can’t or won’t work can’t be helped by a minimum wage.
Thank you for the deeper explanation. Yes, I am only giving a very, very basic view of how money becomes money. Certainly there is a lot of work out there that is never realized as production because there is not a market for it.
Obviously the title to this blog was meant to overstate (misrepresent) the purpose of increasing the minimum wage. Poverty will always exist for a myriad of reasons, but increasing incomes for people who are willing to work will have a huge positive impact on the economy in general and workers specifically. Tax revenues go up, people buy more goods which stimulates business, people are able to feed themselves and their families, people have an increase in their dignity, etc. If the cost of my pizza goes up 25 cents or 50 cents or my burger now costs 10 cents more, I am willing to pay that to a company that pays their employees a living wage.
To correct your statement, I would like to note that in the article I state that the minimum wage is necessary. In addition, please note that for every additional 10 cents you spend in one place, 10 cents is not being spent in another place.
It isn’t necessarily true that 10 cents spent in one place means that 10 cents won’t be spent somewhere else. If that were the case, every new business, say every new bookstore, would put a previous bookstore out of business so that there would only ever be one bookstore in existence at a time. It would be like the Highlander film, “There can be only one.” If the wage goes up, then the person who likes Burger King will be spending 10 extra cents there and the person who likes Wendy’s will be spending 10 extra cents there as well. The person spending the 10 extra cents at Burger King is not impeding the other person spending their extra 10 cents at Wendy’s. They’re both spending the extra 10. It could be that the ceo of Burger King and the Ceo of Wendy’s have a lower wage as the wage of the workers goes up, but I’m perfectly ok with that. Chris Rock famously said that, as a rich person, he’d be more than willing to pay more taxes if it meant that poorer folks had higher wages or more services they could benefit from. I’d like to see a maximum wage similar to what was implemented in England via that Statute of Artificers in 1563.
I agree that the 10 cents isn’t quite 10 cents spent as long as the production is increasing, apropos my point being that money is production in paper form. However, the problem with setting a maximum CEO wage is that you risk off shoring of companies (and thus everybody loses their job) and many CEOs are not paid under the IRS definition of “wages” (e.g. “distributions” are not “wages”). The loopholes in the tax code are immense. As for Chris Rock and many wealthy people like him who are for higher taxes, I admit my respect of their opinion would be greater if they would donate the millions out of their own pockets that they feel should be going to the workers.
I get your point but disagree with your argument. Some people who earn minimum wage work a lot harder than their higher paid counter parts. I see it in the social work field. The case managers and service coordinators on the front line interacting with clients daily make a lot less than administrators sitting pretty in their offices. So I am out in the field saving someone’s life while someone sits in an office and makes decisions; how is their work more valuable than mine? Bottom line is we still have exploitation of workers, oppression, discrimination and a lack of opportunities for people to advance. Most of all the wealthy are too greedy and want to continue to suppress people with the idea that raising minimum wage is a negative!
Please note that my article does not have to do with pay disparities. I didn’t want to get off topic.
I just read an article that some hedge Fund guy made over a million dollars per hour last year. I am thinking that his dollar for dollar pay is about as accurate as the minimum wage workers who are killing themselves for no real wages. Your article is way too simplistic and does not take reality of what is going on in our economy to heart. It is hard to believe a social worker is that big an aficionado of the Reagan, Republican stupidity going on today.
Cyndie, as I note multiple times throughout the comments, I specifically did not talk about pay disparities because I felt it was getting too far off topic. My intent was to talk about what money actually is.
Also, I recommend substituting logical discourse for ad hominems.
The author starts from a position that everything is equal and that money is a true reflection of work. We already know these two things are not correct.
Pay is not equal. Discrimination has an impact on how much people are paid. Example: Women are paid less for doing the same work as men.
Money is not an accurate reflection of work. For example, person A could earn $13 an hour cleaning toilets for company A, while person B could earn $9 cleaning toilets for company B. They are doing the same work. Therefore, money currently reflects something much more than just “work”.
Author rebuttal ignite.
Author rebuttal engage. Actually, Sarah, I never once suggested that pay is an accurate reflection of work. I left pay disparities out of the article because I did not want to get off topic.
Matt is ignoring a plethora of research that shows raising wages for low income workers absolutely reduces poverty! Living wage research by Diana Pearce is an example. Consider the case of Lewiston Idaho and Clarkston Washington, separated only by a river. Clarkston has a living wage ordinance. Lewiston does not. The dollar value meal costs the same at restaurants on either side of the river. Yet, poverty in Clarkston dropped significantly after living wages were enacted.
The only ones who lose when wages go up are the gabillionaires who own corporations.
My article clearly states (in the title, in fact) that the minimum wage does not *solve* poverty. You are therefore incorrect to base an argument on my having said that the minimum wage does not *reduce* poverty, as that is not what I stated.
To wit, the federal minimum wage has been raised 24 times since its implementation in 1938. In the last 76 years since, this country has not eliminated poverty. Therefore, my thesis stands until you can show me that the federal minimum wage has solved poverty.
By the way, this article is a perfect example of why I insist my students think critically, which includes evidence from peer-reviewed studies.
I am assuming you’re attempting an ad homenim. To that end, please consider that:
1) You completely missed the point of the article to begin with;
2) What I stated in the article is common knowledge (or should be to anybody claiming to be an academic), and therefore does not need references; and
3) As far as peer-review goes, I bet you I can find a peer-reviewed article on alien abductions.
To be concrete: (1.) the article is wrong. As I noted, a mandated living wage (aka minimum wage) will end poverty (please refer to Pearce’s work cited earlier). (2.) I was not attacking the author, but rather noting the source was inaccurate and untrusted due to lack of peer-review; (3.) academic standard is peer-review; it is unfortunate that you reject it out-of-hand.
Will,
I’m familiar with Pearce’s work but maybe not the particular article you have in mind. I don’t remember her saying anywhere that a living wage (which to us “economist types” is just a higher minimum wage) would solve poverty if by “solve poverty” we mean end it. It seems obvious to me that this simply isn’t true. There are two ways to benefit from a living wage: 1) you have a living wage job yourself or 2) you are a “dependent” of someone with such a job. Given this, it’s difficult for me to see how a poor person without a job and without access to the money of someone who has a living wage job could have their poverty ended by a living wage. So if all Matt is saying is that a minimum wage won’t end poverty, I think he’s right. What I wonder about, though, is whether he’s arguing against a claim that very few people make.
Tell me why this economic model detailing the depreciating value of raised wages in a retail economy only applies to minimum wage workers and not to the astronomical rise of salaries and bonuses for corporate officers year after year.
Hey there! This post could not be written any better! Reading
through this post reminds me of my previous room mate! He always kept
talking about this. I will forward this write-up to him. Fairly certain he will have a good read.
Thanks for sharing!