Follow-Up
As often happens when two sensible people do some thinking, the core ideas can be pretty close.
Placing wage and safety controls on the workplace is a necessary governmental activity. One additional point is that these regulations are as much about protecting workers from themselves as they are about controlling employer behavior.
If I go out and say, “I’ll pay anyone five dollars to repair my roof during an electrical storm,” I could possibly find somebody to do the work, perhaps even just for the thrill of the risk in some cases. See also greenhorns on Deadliest Catch. Making the offer of employment in that case is unethical based both on the immorally low wage and the obvious hazardous safety conditions, which are easily mitigated in a cost-effective manner (but might not be if I were not compelled to do so).
Saying, “I’ll pay anyone ten thousand dollars to repair my roof during an electrical storm,” is nearly as unethical as the previous offer. I am still providing a needlessly hazardous working environment, and now I am playing off of a wider market’s need for good wages to compel additional people into this dangerous situation. I would guess I would have a line of level-headed but desperate people signing up for that job, not just foolish thrill-seekers.
If somebody takes an 105 hour per week sweatshop job, they took it because it pays off for them somehow. For both safety and humanitarian reasons, nobody really wants to see anyone do that, even though somebody would sign up at some threshold level of pay. We can regulate that and say “that’s quantity supplied that we don’t want.”
But here’s where the philosophies about labor demand kick in. Wage and safety controls establish a price floor that prevents people from accepting opportunities that we as a society believe should be neither offered nor accepted. Nobody really disagrees on that.
The real question is, as the wage rate increases to socially-acceptable levels (which should be reasonably low to allow people to adapt as needed, rather than driving up the unemployment rate by removing low-wage workers from decent but sub-optimal jobs), why aren’t employers hiring?
The capitalist tells you about a profit-thresholded and risk-adjusted marginal cost versus marginal benefit analysis. A good manager should not hire precisely when marginal benefit equals marginal cost; he must realize the risk he is taking on by hiring (threat of onerous new regulation very notably included), as well as producing a reasonable return on investment for the owners of the organization and stable cash flows for its creditors.
This produces a nice free market graph as drawn beautifully by me over lunch:
A side point is that there are people who are willing to work for nothing, especially when there is great experience or a rewarding time to be had. While we certainly have to prevent abusive conditions, making some allowances for these special cases is a great idea.
There were a few great points made in the rebuttal that factor into the capitalist’s decision-making process:
First, high margins. Making a social argument about this probably requires requesting that investors accept lower rates of return on their investments in order to receive higher absolute profits on their investments (the law of decreasing marginal returns dictates that more hiring will eventually and inevitably become less profitable at some point). Accepting a lower rate of return is fine (and rational) as long as the risk of loss is mitigated or low; investors require high margins as compensation for high risk. Clear and forthright regulatory policy and a quality, dependable workforce are the best ways to lower perceived risk and encourage investors to grow profits at the expense of lower unit margins.
An important note here is that regulation in itself is not nearly as threatening as uncertainty about regulation. Known costs adjust behavior and then are factored out of marginal decision-making, even if they ultimately reduce profits. Uncertainty produces an emotional (albeit rational) compulsion to scale back and protect existing profits and margins.
We dealt with the “profit-thresholded” and “risk-adjusted” elements of the decision process. Aside from regulatory uncertainty, the “marginal cost” element is a known factor via the equilibrium or floored wage rate. The remaining argument regarded the “marginal benefit” side of the equation, which essentially boils down to a higher-than-ever unit productivity of American labor.
My response is “yes, definitely.” The free market advocate then stands up and says, “If that’s true and risk/return are acceptable, why aren’t they hiring?” My answer would be: incentives, and a misunderstanding of bumps in marginal cost. If I have a high-tech and super-safe factory, that produces solar panels for Greenpeace vehicles no less, once I have a factory full of workers I cannot scale upward without capital investment.
In most cases, this will eventually become a limitation. And in the dictates of marginal cost, the marginal cost of the next guy hired into a “full” company is extraordinary: before I hire this person I have to build a new factory. Then, my marginal cost goes cheap again and settles in at effectively the wage rate.
Of course, investment is always going on and is profitable, especially under low interest rates. What we don’t need is a government that constantly (1) chides and regulates investment banks and reduces their incentives to seek out opportunities, (2) criticizes the investor class for plowing money into growth-promoting stocks and bonds rather than redirecting it to one-time consumption, (3) excessively taxes the discretionary income of those who have the funds and knowledge to invest significantly as well as consume, (4) rewrites contractual debt seniority agreements to favor labor unions (producing astronomical uncertainty in agreements with large corporations in “blessed” economic sectors), (5) threatens increasing the taxes on returns on investment, (6) threatens removing tax incentives to invest rapidly, and (7) considers risk-compensating profits and highly-paid individuals as moral offenses.
All of these behaviors produce backwards incentives and high uncertainty, which are barriers to otherwise very profitable investments and upscaling of employment. While we cannot ultimately tell shareholders how to direct the assets and strategy of a corporation, creating a favorable environment for growth is the best way to reduce marginal costs and risk, which in turn allows for the lowering of average unit margin while still growing returns due to the high marginal benefit of an excellent workforce.
That’s the business side of maximizing social good. The political side of the left’s messaging (let’s forget if this is even representative of their true philosophy for these purposes) is far different, and far divorced from the basic economics and rational decision-making that both sides should always be able to agree on. I see Obama’s view as being something like this:
The most fundamental difference here is the premised inelasticity of labor demand. This ignores the hardly disputable fact that some jobs just don’t get done (at least domestically) at a certain price floor, at least under capitalistic decision-making. My previous post essentially dealt with this entirely.
Interestingly when placed against the previous business thinking, there is a very populist implication that capital investment is actually downscaling the labor market through automation. Obama’s ill-conceived ATM statement, which almost suggested that ATMs were widely proliferated during his presidency, actually illustrated the point that labor is being priced in excess of the capital cost of automation.
Some of that is the natural progression of technology, but you could argue that a lower minimum wage, below a living wage but in excess of a humane one, might make those capital costs overly burdensome to make that decision. Economics textbooks would also remind Obama that a proliferation of ATMs creates high-tech jobs in ATM development, engineering, and maintenance.
There is another implication that companies are simply over-working their existing force rather than expanding. At the aforementioned limits of morality and social responsibility, this is simply preposterous union claptrap; adapting and becoming more productive is simply being competitive in the labor market. If this competition did not exist, we would be in terrible shape (the UAW tries to limit such adaptation as much as possible, for example, to the point of collapsing the domestic automobile sector). And, if the marginal cost of new employment is low enough, (humanely) mandated overtime makes new hiring a lot more sensible.
Simply telling businesses to go out and hire without exploring why the otherwise-obvious arguments for it (high-quality labor and wide profit margins) are not working is not ultimately productive. “They can afford it” is a subjective call best made by the stakeholders of a business, and one can be sure those decision-makers are watching for signs from the government when evaluating their risks and rewards.