While I think this argument will ruffle a few feathers, I am quite confident it lays bare some very faulty reasoning that is employed in defending CEO pay AND arguments against minimum/living wages.  I need to state very clearly, that this is NOT advocating for a continuance of wage disparity between men and women, but using a descriptive reality to further illustrate an injustice that is irrational and contradictory.  Additionally, utilizing the arguments of those that defend the status quo is frequently an effective means to illustrate the error in reasoning, particularly when not based on outright falsehoods or factual errors.

Recently the NY Times Economix column by Jared Bernstein offered an excellent and thorough walk through of some data supporting the view that income inequality is both problematic and harming the lower and middle class, as well as levels significant charges against marginal product theory of labor costs.  While many may find the argument a bit too academic, I offer another argument that helps to undermine a purely rational view towards wages… that they are the reflective of an individual worker’s contribution towards the end product.  If this were to be true, then a vast majority of management is executing some very poor decision making in who they choose to hire…

Argument:

1) If organizations employ managers to efficiently oversee operations through rational decision-making, then choosing to spend more money, in the presence of equal and cheaper alternatives, is a an example of poor management (to which there is no substantive difference between spending more versus less).

2) If the wages paid to labor are reflective of their contribution to the end product, then the price the end product commands in the marketplace serves to limit the wages paid to labor (also known as the marginal product theory of labor to which the pay of an additional worker is tied to the additional products they generate).

3) Statistical data demonstrates that women are paid less then men.

4) A theory that fails to explain the wage gap or the inconsistency of pay, from top to bottom of an organization, should be abandoned as credible to discussion regarding income inequality and the minimum wage.

Therefore, organizations that fail to employ only women are either poorly managed or marginal product theory lacks the explanatory power to adequately account for wage levels, at both the top and bottom of the pay scale, and should be abandoned.

Raising the minimum wage garners broad support amongst survey respondents across the political spectrum.  However, it must be clearly noted that supporting a raise to the minimum wage is not necessarily a view that supports a living wage.  The minimum wage encompasses a view towards the value of an individual’s contribution and an implicit component of basic human dignity.  The living wage is similar to the minimum wage, however differs in aiming to include a view regarding the amount of hours worked balanced against the costs of basic needs.  While much of Europe embraces a living wage, it doesn’t appear to be the case that Americans are not yet ready to accept that a 40 hour work week should yield enough income to meet basic needs.  As a result, raising the minimum wage is about increasing a fuzzy valuation of basic human dignity, but stops short of a more holistic view that that human dignity should encompass both a 40 hour workweek and basic living expenses.

Now… if an organization needs inputs to produce its goods or services, then choosing amongst suppliers generally entails evaluations of product quality, reliability of timely delivery, and cost.  If two suppliers are of generally equal reliability and quality, then choosing the more expensive is an example of an irrational decision.  It follows that if two applicants for a job are available, then management should hire the applicant that is perceived to be capable, reliable, and less costly.  Notice that this assumes that the applicants are in a power position that negates the power of the firm to dictate wages… the applicant is selling their labor services… many can, and should, find this a very problematic assumption.

Here is where marginal product theory applies to labor costs… if the position is on an assembly line, or within a process driven organization, the additional worker is going to be viewed as contributing to the outputs of the firm.  The wages offered to the applicant will be bound by an evaluation of their contribution to the outputs, but in a very generalized manner.  The applicant will be excluded if their wage demands are for 10,000 dollars an hour to work on an assembly line that produces 10 units an hour costing 100 dollars each.  It is here that the marginal product theory holds in who is eliminated from consideration and provides that upper bound of what can be offered in relation to the price of the output.  However, note the implicit assumption here is that the output price is stagnant.  Opponents of minimum wage and living wage are dependent upon a view that the price level is delivering the optimum level of sales.

Furthermore, the marginal product theory approach becomes particularly absurd when considering the other end of the pay scale.  If the pay of a CEO is reflective of their contributions, just like the lower paid worker, then we must accept the findings of a recent Bloomberg article hat the 1,795 multiple of the average worker pay awarded to former JCPenney CEO Ron Johnson was justified.

The problem with the above view is that it fails to recognize the benefits of the qualitative.  Happy workers, good public relations (Costco’s praise for paying their workers well), lower turnover of employees.  Quantifying the value of happiness and the public relations benefits are much more difficult to project and draw direct causal links to improved sales or profits.  The focus of management tends to rely on the direct benefits, while failing to look to the indirect benefits that may result.

Therefore, if management cannot provide good reason to hire a man over woman, then rational thought would dictate that the economic savings should result in full employment of women before hiring any man.  If the generalized figure of 77 cents for every dollar a man earns holds, then a good manager could reduce their labor costs by 23% for each new hire!

Naturally, the problem with this conclusion is what philosophers term ‘leveling down,’ and few would really find this satisfying in light of the fact that prices generally rise and would significantly augment the problem of income inequality.  Furthermore, to any libertarian minded readers, this would likely result in significant deflation… an initially attractive sounding idea that bears very, very bad consequences… have a mortgage? car payment? student loan?  In the situation of deflation, yes, prices are dropping… but the house, car, and student loan payment did not get cheaper… and since wages would drop for men (roughly half the workforce)… that would be a very significant effective increase.

Therefore, in summary, arguments against raising the minimum wage using anything relating to the value of the worker’s contribution must similarly justify exorbitant CEO compensation.  Similarly, if rationality dictates choices executed for good reasons that can be justified with good evidence, then ladies holding the needed qualifications for a position rejoice… you should be headed for full employment… or it must be conceded that the marginal product view of labor is too general to be of any real use.  The theory is akin to answering what foods contribute to a healthy diet by replying, ‘those that do not contain cyanide’… good advice, but not very useful!

And if you missed this particularly brilliant illustration of absurd rationality that relies upon ignoring reality… behold the brilliance of Samantha Bee

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