Minimum wage? How much should an employee be paid?

Canadian factory, circa 1913.
Canadian factory, circa 1913. (Public domain image)

WASHINGTON, September 14, 2014 − Although issues like the Ukraine Crisis and the Islamic State threats are extremely important to the United States, the tendency of America’s political leaders to distract themselves by over-focusing on a handful of issues at the expense of others is clearly on display during this mid-term election cycle.

Lurking in the shadows, however, is an arguably more pressing issue. The still ailing American economy is not getting the attention it needs from US policymakers, professional news outlets, and the American people, PR spin notwithstanding. Despite the need for serious debate on the widespread imp ace of America’s economic policies on the majority of its citizens, debate on the subject is focused instead on demanding an increase in the minimum wage, ostensibly as the single best way of solving the nation’s economic stasis.

But perpetually raising the minimum wage for the primary purpose of attracting votes aggravates a whole list of problems already plaguing the US economy, while never truly addressing the root causes behind the alleged need to increase the minimum wage.

Conceding the points that what people are being paid matters and what people are able to earn in the future matters, the Nation needs to have a serious discussion on how much people should be paid and for what.

It is important to recognize that the intrinsic value of an employee’s labor is the profit his or her firm can make on that labor, given that the employee’s salary is ultimately justified by the company’s average expected revenue. Unfortunately, high-paying, labor-intensive industrial sectors like manufacturing have seen labor values undercut by outsourcing and shifts away from some product lines.

Further undermining basic wage levels in these sectors are increasing and arguably unnecessary expenses such as ever-rising environmental costs generated by often needlessly tougher regulations, healthcare mandates, and the ensuing fallout of the climate change lobby. Other industries also are burdened by these same trends during economic slums.

On the other hand, undervaluing a new employee’s labor is not a wise move in the long run, whatever the reason. In fact, it is harmful in the longer term. Corporations and small businesses alone should not be allowed to value the labor they consume, because they will tend to undermine labor and create imbalance in the broader economy. This can contribute to instability like any situation where an essential product is undervalued and over consumed.

For example, employees can be overworked and paid too little to support a positive and healthy lifestyle. As such, employers must look at salaries and wages as the long-term value of an individual’s labor in order to retain current employees and attract new ones.

Clearly, human resources are a major cost of doing business. More often than not, employee wages consume a large portion of a company’s budget. For employers in a tough economy, ensuring their company can keep the doors open in the face of economic decline or P&L issues will likely mean reducing the current number of employees or slashing pay by replacing seasoned employees with new hires.

This methodology has been quite popular since the bottom fell out of the economy in 2007-2009, as older, more experienced employees finally benefiting in their peak earning years are tossed out in favor of hiring new employees to do the same work, or more, for vastly reduced wages. Aside from adding to the still massive percentage of veteran employees who can no longer find viable work at decent pay if they can find any work at all, their replacements suffer just as well, and not only in the short term.

A new, young employee’s starting wage quietly establishes a baseline figure can follow that individual for life in terms of future salary or wage increases. Although this may be good for employers in the short term if an employee is content with his or her wage or is simply grateful to have a job, it can eventually cause problems when it comes to employee retention.

Worse, such an employee is effectively trapped in a lower wage or salary band in widespread application, potentially leading to a lifetime of severely reduced purchasing power. But the negative ripple effect travels through an industry and through the economy on a more massive scale as other employers follow the pattern. Across the board this can lower employee salaries and wages on a national scale, which equates to less overall consumer spending and weaker economic growth−a circular and self-defeating pattern where there are few winners.

Meanwhile, costs are constantly rising and this includes the cost of living. For employees, this dictates a need for a higher salary or wage, negating the temporarily positive effect of wage restraint. Ultimately, either through new employment opportunities or raises, employees must eventually achieve increased pay if only to maintain their current lifestyles.

Although some raises are scheduled periodically by many companies, others, sometimes in the form of performance bonuses, may be awarded under special circumstances.  Because employers typically want to retain most experienced employees, periodic raises are usually necessities for both employers and employees. But starting with a lower pay can mean a youthful or laid-off employee has to change jobs more often to keep pace with his or her peers, while offering a lower salaries makes a business less competitive in such circumstances.

Like all commodities, labor needs to be valued fairly. Every time a company offers a certain amount of compensation for a particular position, they are helping define the value of a person’s labor in that or similar positions.

Beyond the consumer of labor (the business), the supplier (the employee) must also contribute to this process. Because the value of labor is defined over an entire workforce, ensuring labor is properly valued requires all employees to accept a certain level of pay for their services.

On the flip side, businesses can only pay their employees what they can, or want, to afford. This dictates setting the pay of new employees by balancing the minimum the employee will accept and the anticipated value of that employee’s labor over time.

Arbitrarily imposed minimum wages don’t address that problem. They add to it by distracting every stakeholder from getting at the real core of the problem which involves the fair realistic evaluation of labor and compensation on all levels.

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