The discussion around the minimum wage usually gets confused over whether the market can somehow magically find the right amount. The market-based rationale is incomplete. To help make this clear, we should consider a couple of examples.

Work worth $50/hour

Imagine an hour of work yields $50 of value to the business (after subtracting capital and other costs). How much should you pay the worker? Assume the minimum wage is $10/hour.

  • If you pay the worker more than $50/hour, you are losing money and the business could fail.
  • If you pay the worker the entire $50/hour, there is no profit to the business, and no income for the owner(s).
  • If you pay the worker less than $50/hour, there is profit to the business and the owner(s).

How much should you pay the worker(s)? Clearly less then $50/hour, as the business should make a profit. Clearly at least the minimum wage, as required by law.

If the business cannot hire workers at $50/hour, the business will fail.

If the business can hire enough workers at $10/hour, there is no reason to pay more. With $40/hour in profit, the business owners will be very happy.

This is the scenario for the majority of working folk in the United States (and many other developed countries). When there are more folk looking for work, and fewer jobs, offered wages will be low. At the same time, company profits will be high - which is what we see today.

In this case, if the minimum wage is raised to (say) $25/hour, the business is still quite profitable.

Work worth $200/hour

Now imagine a case where work is worth more to the business, but there is a limited number of workers with the needed skills. (This in fact describes my profession - writing software - as only a small portion of workers have the needed skills and aptitude.)

In this scenario, minimum wage is irrelevant, as the business must offer higher wages to attract workers.

Where we are today

Increasing automation means more wealth from less human work. This is a wonderful thing!

Increasing automation also means fewer hours of human work are needed to produce the same amount. In the normal run of human activity, we can produce everything we need with fewer folk working, or folk working fewer hours. This becomes a problem, as we do not know how to organize our society and economy in a way that (to us) makes sense. As a result, wages are low for the bulk of the population. This leads to weak demand, which impacts business, and then business pays less to workers, which leads to even weaker demand…

The above is an unstable equation. We have an unstable economy. The usual dogma about how to organize our economy is simply not working.

As automation continues to progress (again - a wonderful thing), we need to adjust by allowing folk to work fewer hours. Increasing automation means a steady and growing surplus of workers. We will need to steadily raise the minimum wage, so fewer hours of work are sufficient to human needs.

Yes, this means that marginal businesses will fail - as is entirely proper.

Taken together, the above means a steadily rising minimum wage is essential both for a stable economy, and to have an economy that is good for humanity.