Results tagged “economics”

Kathy M. Kristof wrote an intriguing column in the Los Angeles Times this week. She asserted that CEOs need to cut their pay to save capitalism. The reason? Stockholder trust is eroding.

Kristof offered James D. Sinegal as the model example. As the CEO to Costco, Sinegal earns a salary of $350,000 and a bonus of no more than $200,000. Sinegal has refused raises, and Costco's board feels Sinegal is underpaid.

As investors lose trust in the management of publicly traded companies, investor capital will shift from stocks that pay a share of the profits (and losses) to company bonds that carry a contractual rate of return.

I hope our representatives in Washington will take a lesson from the financial problems that California faces. Our state, burdened with the expenses of our massive education and health care systems, is teetering on the edge of insolvency. Our State Controller, John Chiang, has been forced to delay payments to guarantee that the state has enough cash on hand to meet high priority obligations. Among other things, $2 billion in tax refunds will be delayed for 30 or more days.

I frequently see Democrats propose a significant increase in the minimum wage, also known as a "living wage," as a solution to what they see as the exploitation of the lower class. This would be disastrous. A price floor for unskilled labor has a multitude of negative effects on the very people it's meant to help. The minimum wage in the United States is close to the equilibrium rate for unskilled labor, but the following negative effects would become far more pronounced if the government mandated a significantly higher living wage.

• A minimum wage reduces the freedom of employees and employers. Just as a minimum wage tells the employer, "You may not hire employees below this rate," it also tells workers, "You may not accept work unless you can compete at this rate."
• An employee desperate for a job cannot undercut minimum wage workers. Minimum wage laws are regularly peddled in third-world nations as an instrument of discrimination to prevent minority groups from competing for jobs.
• Lower profit margins for employers encourage them to outsource jobs or switch to a business that does not employ low wage workers, thus decreasing the number of minimum wage jobs available.
• Employers pass higher costs to their customers by raising the price of services, which disproportionately increases the cost of living for the lower class.

A minimum wage benefits some at the expense of the least experienced and least productive workers. It renders the least employable workers unemployable.

If the goal is to improve the quality of life for the lower class, much more effective solutions exist. The best solution would be to reduce the supply of unskilled labor through voluntary vocational training programs. This would empower workers to take higher paying jobs while driving up the equilibrium rate for the remaining unskilled workers.

Heavy-handed government solutions that make more economic sense than a minimum wage include a negative income tax or earned income tax credit, both of which pass the financial burden to the entire society rather than the employers and customers of unskilled workers. A more radical proposal is a social security program of basic income.