Editor: There have been several discussions about wages and prosperity in the Wave, the most recent one from Lamar Johnson that was in harsh contrast to the views of Aaron Gabrielson’s more libertarian perspective. Mr. Johnson’s statistics about minimum wages did not include Denmark, Germany, Italy, Norway, Sweden and Switzerland which have no minimum wage and some of those nations have low unemployment and strong economies but on to the message.
Mr. Johnson is absolutely right about human nature and the presence of greed. Jobs are created by investors. These are greedy people who are willing to risk their money in expectation of earning a return on it. This is true whether Mr. Johnson and Mr. Gabrielson pooled their money for a carry out pizza business or venture capitalists funding a few biochemistry professors from Stanford to fund their research into a treatment for stupidity. A business must eventually have customers to succeed but investors can create jobs for years by risking their money. Amazon was not profitable for 10 years so how did they hire all those workers? They had investors, some of whom are basking in a share price over $300 today.
There is a feeling among many that investors exploit workers to increase their returns on the capital they placed at risk. Investors do want to increase their return and most realize that having a loyal and productive workforce is part of that. If you routinely underpay, your best employees will leave. The trick is just how much, absent of some government interference, is an employee worth. That’s not easy but part of it is based upon the extent to which the investors earn a decent return on their investment and another part of it is what another employer would pay for like contribution. There is a reason why an automatic transmission mechanic is paid more than the car wash attendant at a car dealership. This is part of supply and demand.
But, greed isn’t confined to investors. Employees are somewhat greedy too. How many think they should be paid less? There is an economic value to labor that is somewhat derived by what the investor can receive for the services an employee can provide. In the case of the pizzas operation, there is an upper limit on what you can charge for the pizza and that has to work its way down to the employees.
Now, when government comes along and demands a higher wage, there is risk of paying an employee more than can effectively be captured through higher prices or other cost cutting measures such as less pepperoni per slice which could affect sales. So, the higher wage is now an example of another component of human nature, our undying faith in the free lunch. It may be fashionable to say if CEOs were paid less, the proletariat would be paid more but if the CEO was paid less, the investors might not be there either.