Humane economics

A new candidate, Amir Peretz, was chosen as the leader of the Avoda (Labour) party, one of the two traditionally largest political parties in Israel. Essentially that means that he has a decent chance (As always, depending on who else is running, and a myriad of other details) of becoming the Israeli prime minister following the next elections.

In the past, and where he gained most of his political attitude, and support, he was a union leader, and even led a party focusing on union rights (Yes, I’m oversimplifying a lot, but that’s the gist of it for this post’s purpose). And so, unsurprisingly, he keeps on with making loud political promises of employee rights that he will take care of if he will get elected.

Including a very explicit statement, which he stated a few times in the last few days, about the minimum wage. Specifically, he promises that if he will be elected as prime minister then he will increase the minimum wage to 4700 ILS. This is about 990 USD.

Never mind the exact amounts. The change is the important part. The current minimum wage is roughly 3500 ILS (or 740 USD). So we’re talking about a raise of approximately 34.2%. This is, if it’s not obvious to everyone, a lot.

But Mr. Peretz does not bother to specify how will the money be obtained. It’s a very simple thing, according to him. Everyone who receives minimum wage now, will just have their salary drastically increased. So the employees will have more money, and everyone will be better off.

Amazing why nobody thought about it before. So simple. Heck, maybe the wages should be even doubled, that way everyone will be even more better off and could live really well.

Oh, wait, there’s a slight snag. It has something to do with economic reality, the way the job market actually works…

Where the heck does he think the money is going to come from? Companies, the same entities who employ these minimum wage workers, pay them the salary in order for them to produce something. Something which the company will then be able to sell, in order to obtain income. And it needs that income, because that’s where the salary money comes from. It’s a fairly basic economic reality, the salary heavily depends on the production of the employee. The company cannot pay an employee more than that employee contributes to the company, since at this stage the employee is worse than unnecessary.

Most people who are worth to the company (In the manner of their contribution to the company’s income) more than the minimum wage, would have received a higher salary. Because otherwise they could have gone to a different company, who would happily offer them such a higher salary. It would be worth it to the other company, as they would still be making a profit from the deal. And it would naturally would be worth it to the employees, who normally have no qualms about getting more pay.

Generally speaking, the reason for people getting just the minimum wage is not that the companies enjoy exploiting them, and are trying to get rich on their account. Sure, there may be some of it, but it’s far from being the all prevailing reason. For most places, if they have to pay so much more to their employees, it becomes unprofitable to keep the employees. Many companies would be losing money. Not just cutting the profits, but moving from profits to losses, in any divisions that hire those minimum-wage employees.

The result of which will be mass firings, and an increase of unemployment rates. So instead of getting minimum wage those people could stay at home without any income, looking for a new job that nobody would offer them at the minimum salary they could legally accept getting unemployment benefits. This would hardly benefit those people that the increase is supposed to help (If unemployment was so much better for them than the minimum wage, they would have stopped working right now. Well, many of them do, but that’s a different story and I won’t get into it). And it would greatly hurt a lot of companies, both big and small, and as a direct result will also hurt the economy of the country.

Unless the government is going to subsidize the salary increase. In which case firing those people will not necessarily be the obvious solution, since the cost of hiring them would not rise. But that is an entirely different problem, namely where will the government take the money from? Since nothing can be cut back so drastically (there are a lot of people there getting minimum wage, on aggregate the amounts of money to finance this would be staggering), we’re talking tax increases. Large ones.

Which, you guessed it, hurt companies and force them to cut down on the workforce in order to cut costs. But will also hurt everyone else (Such as, if you’ll excuse the political incorrectness, employees who are getting more than the minimum wage, because they have valuable skills, or invested in studies). Many active businesses may stop being lucrative, causing them to close down, hurting both all their employees, and whoever was using their products.

All these options would result in an increase of the unemployment rate, and in a reduction of the GDP. This massive raise of the minimum salary would greatly hurt the economy. All of which will, as a minor side-effect, make it even harder to maintain the artificially high minimum wage.

But no, a claim on the newspaper this morning calms us. Peretz is not blind to the economic realities. He believes in economics, but he believes in Humane economics. Whatever that means. Ah, right, it means economics that pay attention to the well being of the people, and do not let themselves be confused with facts. If it is good for the employees, it doesn’t matter that it’s not sustainable for long enough for the people to enjoy them before being smashed over the head with the consequences…

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