19 March 2013

Foolish Thinking

I love this crazy lady
Elizabeth Warren says that minimum wage should be $22/hour.  Well, she doesn't say it, she says someone else says it would be if wages kept pace with productivity.  And apparently she agrees.  And when you are on the Senate Committee on Health, Education, Labor & Pensions, when you agree with something this stupid, the rest of us had better hold on to our wallets.
Let's put aside the notion that legislators, most of whom haven't the foggiest idea how to create and/or adhere to a budget much less about crazy things like marginal productivity, have insight into what the minimum amount a worker should be paid regardless of that worker's marginal productivity (i.e., no matter what value is produced by a given worker for that hour of labor, we will pay him $x because... well, because that's what's fair!, until, of course, it isn't fair anymore).  Got it?  Let's just ignore all of that.
Let's concentrate on productivity.  Labor is a factor of production, labor does not equal production.  The factors of productivity (Y) are Labor (L), physical capital (K), human capital (H) and natural resources (N).  So the production function would look like this: Y = f(L, K, H, N), because productivity is a function of its factors.
But what about technology?  Technology has its own variable, A, and technology is not a factor of production.  It is a variable that increases (or decreases, let's not forget the Dark Ages), the effective productivity of all factors as the variable increases (or decreases).  So the real production function looks like this:
Y = A f(L, K, H, N)
What this means, simply, is that there is no direct correlation between the increase in productivity and the marginal contribution of any particular employee's labor, and a general increase in Y has no direct correlation to the quantity of L in the macroeconomic sense.  So when they stopped using people to connect phone calls through switchboards and moved over to computers, this increase in productivity (more phone calls being routed quickly, efficiently and correctly all around the country) was not the result of "better labor" or an increase in the marginal production of the labor force.  What the productivity function shows is that productivity can increase even if a particular factor decreases or remains unchanged.
So the question is, is the marginal product of the burger-flipper $22/hour?  Of course it isn't.  How can I say that so easily?  Because the market doesn't pay $22/hour to uneducated, unskilled people to flip burgers.  Because that would be an inefficient allocation of resources.  Resources that must be taken from elsewhere to make up the difference to the person not contributing $22 worth of goods or services per hour of labor to the market.
So even if $7.25 seems unfair please note that fairness is a matter for philosophers and priests and seek counsel from them.  Because $7.25 is also a distortion, just not to the degree, that $22/hour or $100/hour minimum wage would be.
See here, here and here for further readings.  And call you congresscritter and ask humbly that the minimum wage be abolished.

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