The Minimum Wage and Indifference

We Can Predict The Effects Of Seattle’s $15 An Hour Minimum Wage.

In light of Seattle’s recent decision to raise its minimum wage to $15 an hour, numerous free-market writers have done an excellent job detailing the long list of economic arguments against the notion that minimum wage laws benefit the poor.  I assume most readers are well-versed in the basics, so I won’t be reviewing the general arguments against raising the minimum wage.  Rather, I want to address one specific issue that is occasionally brought up in these discussions – the notion of indifference.

Writing for Forbes, Tim Worstall addresses the issue of indifference while commenting on hotel employees in SeaTac (where the minimum wage is already $15 an hour).  He tells us of two employees he spoke to who were dissatisfied with the wage increase, because it was accompanied by a decrease in non-monetary benefits.  Employees saw their wages go up, while perks such as free food, free parking, and paid holidays were eliminated.  Worstall explains:

“Employers look at the total cost of employing people. They’re indifferent (that is, they just don’t mind) whether that’s made up of wages only, or wages and benefits, or what the precise mix between the two is…” 

While his analysis of employers being indifferent is correct, he does not address the issue from the perspective of the employee.  He highlights employees who are upset at how the minimum wage increase motivated employers to reduce non-monetary compensation in exchange for higher monetary compensation.  But these employees may be missing the bigger picture.  The average person would be expected to have a preference for increased wages in lieu of non-monetary benefits.

Money is fungible – meaning it can be used to satisfy a very wide variety of potential desires.  Most of us would much rather have $50 in cash than a $50 gift card for a local boutique – after all, what if the boutique doesn’t have anything we’re interested in buying?  But if forced to choose between a $50 gift card and a pair of pants (valued at $50), we’d take the gift card.  What if the pants don’t fit, or we don’t like the style?  If monetary values are equal, we naturally prefer to receive compensation in the form of money, rather than highly specific items such as free parking, the total benefit of which will vary radically from person to person.

Economic historians often outline the progression of economies starting with a barter system and developing into a monetary economy where goods and services are exchanged not for other goods and services directly, but for money.  When you sell your labor for money, you can use that money to purchase anything you desire – including parking, lunch, or other benefits your employer might have provided to you as compensation.  Or you can choose to not have these things at all.  If you walk to work, you wouldn’t place a high value on free parking.  The abolition of parking in exchange for higher wages would be a pure gain.  Rather than a dreaded scenario worthy of scorn, this is a development to be celebrated.  Employees are receiving much more flexibility regarding how their compensation can be used to benefit their own lives.

This is not to say that an increase in the minimum wage is a great thing – it is still an unnecessary government intervention into the economy that creates a whole host of problems for low-skilled workers.  There might also be very legitimate reasons why employees may have preferred the previous state of affairs (perks and a low wage) to the current one (high wage, no perks).  Perhaps the employer was able to negotiate a group rate for parking that individual employees would not be able to obtain for themselves.  Or perhaps the employees were accustomed to eating large amounts of free food that was highly marked up, so the benefit they received was higher than the pre-markup cost of the food to the employer.

Optimally, the government would not be involved in any of these decisions, and employers and employees would be free to negotiate whatever terms of employment they deemed appropriate.  This might include a high wage with no benefits, or a low wage with many benefits.  Each individual will seek an arrangement that best suits their needs and desires.  Employers may be indifferent towards differing forms of compensation, but individuals are not.  While monetary compensation is preferred if all things are equal, in real life, this is rarely the case.  Understanding this distinction is critical to comprehending a large portion of debate surrounding minimum wage policies.