Why raising the minimum wage won’t make prices go up

27 Jun

By Mike Treen, National Director, Unite Union

Every week we come across bosses arguing that that “can’t afford” a pay rise for their workers. Right wing economists and commentators also argue against an increase in the minimum wage because it will only lead to a rise in prices and therefore cancel out any temporary gain.

Sometimes even workers or labour-friendly economists repeat the same tune when discussing whether it is a good idea to raise the minimum wage.

I want to use the experience of the fast food industry to explore the truth of these claims. Recently, I travelled to the US to be part of an international fast food workers meeting. We discovered that there was little relationship between wages and prices in the industry when comparing different countries.

The highest paid workers were from Denmark. They are paid the equivalent of $US21 per hour and have a guaranteed 40-hour week. In the US, most workers were on the legal minimum of $7.25, or just above. Yet the “Big Mac” in both countries costs about the same.

I travelled to China a few years ago and found out that a Starbucks coffee costs the same (or even a bit more) than in NZ, yet the workers were paid the equivalent of $NZ5 a day – and that’s a ten-hour day.

For some obscure reason, Pizza Hut pizza’s are considered a bit of a middle-class item of conspicuous consumption. They cost at least $NZ20 each in a restaurant.

A major flaw in the argument against increasing wages is that it assumes that businesses have not already set prices for their commodities to maximise their profits. Those prices, as we see in China, often have little do with the price of labour.

The converse has also been true in New Zealand where real wages for most workers were pushed down savagely during the late 1980s and early 1990s without the overall price levels falling. The end result was a massive boost to corporate profits and a decline in the wages share of Gross Domestic Product.

Why that happens is explained well in an article published in Liberation News in the US.

“The fact is that businesses strive at all times to maximise its rate of profit so as to ensure survival against the competition. The main exception to this rule is when business owners calculate that temporarily lowering prices will gain a bigger share of the market—perhaps driving out competitors—after which they can raise their prices back up sufficiently to compensate for any short-term loss.

“The rate of profit, of course, varies from business to business and over time. But competition and the market tend to push the individual rate towards an overall average. If profits rise above that average, capital tends to flow into that area of the economy—businesses expand or new ones open up—which raises production and supply relative to demand, pushing prices and the rate of profit back down. The obverse happens if falling prices cause the rate of profit to sink below the average. In that case, capital flows out of that sector of the economy lowering production and supply relative to demand, pushing prices and the rate of profit back up.

“Now, if the workers through mass struggle win a higher minimum wage, the result will likely be to lower the rate of profit of the employers affected, though it can also increase their business, since low-wage workers will have more money to spend. But assuming that on balance their rate of profit does fall, the affected businesses may very well attempt to recoup by raising their prices, just as the right wing economists argues.

“However, if prior to the increase in the minimum wage these businesses had already set their prices to maximise profits, prices cannot then be raised following the minimum wage increase—assuming competition and market demand remain unchanged—without causing a fall in demand relative to supply and a further fall in the rate of profit. What will happen instead if the rate of profit remains depressed, and if it is below the average rate of profit, is that capital will flow out of that sector of the economy, pushing supply down relative to demand and prices up, boosting the rate of profit back to the average.

“The outflow of capital can, of course, take the form of businesses contracting, or in some cases closing down altogether, resulting in workers losing their jobs. However, it is likely that the increased demand resulting from the rise in the minimum wage, which to some extent will also push up other wages—for example, managers’ wages at fast-food restaurants—will enable their competitors and other businesses to expand and hire more workers, increasing job openings elsewhere.

“Various studies have shown that in general, there is no overall loss of jobs as a result of wage increases. Therefore, the net result of wage increases is that more money ends up in the pockets and bank accounts of the workers, on one hand, and a somewhat lowered individual and average rate of profit for the capitalists, on the other. That is a desirable outcome in view of the fact that today, many low-wage workers depend not only on their paychecks to live but also on tax-payer-funded food stamps to have enough to eat and Medicaid and/or emergency rooms for their health care—in effect a subsidy for the capitalists.”

In New Zealand, the form of the wage subsidy for the capitalists is the tax and benefit system known as Working For Families. It provides subsidies to working families with children. We also have a landlord subsidy in the form of the Accommodation Supplement. A radical increase in the minimum wage to the level of the “Living Wage” (currently estimated as $18.80 per hour) would allow us to eliminate or at least significantly reduce these subsidies for the capitalists while simultaneously attacking radically the inequality that exists in society.

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