The Horrors of Wealth Redistribution

Is minimum wage increases an an evil hidden scheme to engage in wealth redistribution? Keep reading to uncover the truth about this devious plot.

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If there is anything that truly scares conservatives and neoliberals it must be the idea of wealth redistribution. The horror keeping them awake at night that somewhere a poor person is getting a higher pay at the expense of the affluent turning him lazy and entitled.

Yes I am obviously exaggerating here, but only ever so slightly. I am reminded time and against that “wealth redistribution,” is basically a curse word in neoliberal circles.

I was reminded of this recently when discussing increasing the minimum wage in the US. Somebody on social media was warning me of the dire consequences of raised minimum wage:

What you are talking about is wealth redistribution disguised as minimum wage increases.

That is right. Does that not make you flee in terror, knowing that increasing minimum wage, may in fact be evil “wealth redistribution” is disguise? I guess by now you have all but given up on a higher minimum wage? Because you don’t want wealth redistribution now do you?

If you want that, it means you are a socialist. No, wait it may mean you are communist! And that is a slippery slope towards Stalinism. In effect raising the minimum wage is really opening the doors to the Gulags. Mark my words.

Actually I should not be joking. I should give this a serious analysis, because there are many logical fallacies baked into this statement that unfortunately many people fall for.

It is indeed true that if you raised the minimum wage it would cause a wealth redistribution. However this should not really be a surprise to anyone. In fact it is not possible to raise any wage of anyone without causing a wealth redistribution.

Why is that?

Consider where wealth really comes from. It is from all the goods and services produced in a country. Money is just paper or numbers on a spreadsheet, that facilitates the exchange of the goods and services produced. Printing more money doesn’t cause more goods and services to spring into existence. Likewise doubling your salary doesn’t mean you are suddenly producing more goods and services. Except if perhaps this caused such joy that you immediately worked twice as fast.

In general we can say, salary as decoupled from how much goods and services are produced. Increasing or decreasing people’s salaries doesn’t change how much goods and services are produced in a country. At least not in the short term.

What salaries determine is how the total pie of goods and services produced in a country should be divided among its citizens. The slice of the pie you get is proportional to the salary you get relative to everybody else. You can double the salary of everyone and the slice you get remains the same, because the pie of goods and services has not increased.

However if your increase the salary of some people by keep the salary of others fixed, that means the ones who got a raise are not getting a large slice of the pie. But that must necessarily mean that everybody else gets a slightly smaller slice of pie.

It is a zero sum game.

Neoliberals like to deceive you on this point by only raising this fact when the topic of minimum wage is raised. They want to remark that raising the minimum wage is bad because it causes prices of the goods made by people on minimum wage to be raised, meaning everybody else can buy less of their products etc.

This is to create the impression that raising the minimum wage solves no problems and just create a bunch of losers.

What they don’t point out, is that this effects happens with every wage. It is not limited to minimum wage. Every time you take a new job and negotiate your salary up, you are raising the costs of that company and thus the price of the products they sell. Thus you are making everybody else poorer.

But that follows from our pie example. Every time somebody gets higher wage, they get a bigger piece of the pie. Since in the short term the pie doesn’t grow, this happens at the expense of somebody else.

Thus every time you get a higher paid job, ask for a raise, or negotiate a higher salary for a new job, you are in fact engaging in evil wealth redistribution. You are redistributing wealth away from everybody else towards yourself! How evil!

If you want to avoid wealth redistribution, it would in fact be better if you simply worked for free. Then you would not incur a cost on everybody else.

I know this all sounds incredibly silly, and that is exactly my point. Complaining about raising the minimum wage causes wealth redistribution is an utterly silly thing to be concerned about, because every change in wages does that. There is nothing magical about minimum wages.

Neoliberals will attempt to mock the idea of higher minimum wage by suggesting some absurd minimum wage, to attempt to paint those pushing for higher minimum wage as being detached from economic reality.

We can of course not push minimum wage up to whatever we like. As I said, it doesn’t cause the pie to get bigger, but it changes the distribution.

If you set the minimum wage absurdly high, then people with minimum wages would end up getting a bigger share of the pie than people in more high skilled jobs. That would not seem fair.

One obviously need to strike a balance. Skill, responsibility and complexity of the job should be compensated. But there is no universal law that says the difference between highly skilled professions and less skilled professions need to be what it is in the the US.

My native Norway is a counterpoint to that. Actually I cold have picked numerous countries as a counterpoint, but Norway is where I happen to live, and so I know the dynamic of how wages develop better. Norwegian GDP per capita is quite similar to the US. Meaning Norwegians should in principle make similar kinds of wages to Americans. Except the wage structure is very different.

Meaning if you take the pot of money available to pay inhabitants wages for their work, the money has not been doled out in the same fashion as the US. The size of the pot may be similar per inhabitant, but it has been doled out far more evenly.

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The US is a rather extreme outlier in how unevenly wages are distributed. In the US the average CEO makes roughly 265 times the average worker’s salary. In Norway in contrast the average CEO makes 20 times as much as the average worker.

It means in Norway the low wages tend to be higher and the high wages tend to be lower. But there is a still an advantage in having a higher skilled job. The advantage is simply not as pronounced as in the US.

Thus there is ample room to increase minimum wage, especially in a country such as the US. However there is naturally a limit to how much you can increase it. You don’t want it to be more beneficial to work at say McDonalds than to be a medical doctor.

This is another popular argument against a higher minimum wage. Again there is nothing magical about the minimum wage even if neoliberals like you to believe that.

Any wage increased will cause inflation if the productivity of the country isn’t increased or some other wage is not reduced.

E.g. in Norway in the 1970s there was increasing inflation because oil worker wages increased too rapidly. So in fact nothing to do with raising the wages of those paid the least.

In fact you can see this effect anywhere whether there is an oil boom or gold boom. There will be an inflation in prices as demand will far outstrip the ability to increase supply.

Inflation isn’t a problem as long as it stays within a reasonable label. What neoliberals really want to give you the impression of is that minimum wage increases are pointless because all the gains are eaten up by inflation.

But that is wrong. To explain why, we need to be a bit more specific. Inflation is calculated as increase in price of a basket of selected consumer products and services.

If we say double the wage of pizza bakers, then the price of pizza will increase. But the price of pretty much everything else will stay the same. Because pizza is in the basket of goods measuring inflation, we will statistically speaking report a higher inflation.

However seen from the perspective of the pizza baker, they are most definitely better off after doubling of the salary. Sure pizza now costs more for them as well. But rent, gasoline, diapers, furniture and everything else costs the same. Hence they are better off.

Everybody else are slightly worse off, because they have to pay more for pizza means they can spend less on other stuff. This makes sense. The only way the pizza baker can get more of the products and services made in a country is because everybody else get slightly fewer of those things.

Of course inflation is not irrelevant in every case. That people have to pay more for pizza does not make a big difference.

However if a company is exporting goods to foreign markets they will be negatively affected if their workers suddenly get much higher salary. They may loose competitiveness to competitors in other countries.

Reduced exports will make your country poorer.

My native Norway is very much aware of this problem, which is why there is a specific strategy or system if you like for how unions deal with inflation.

In Norway government and leaders for companies and unions meet every year or so to discuss salary increases. There they look at Norwegian inflation, productivity gains, cost development with foreign competitors etc.

The agreement is then typically that Norway may only increase salaries for the export industry in such a way that competitiveness is not lost. E.g. if productivity is increased by say 3%, meaning each worker produce around 3% more products than before on the same time, then typically you can also increase salaries with 3% without losing competitive edge. Or foreign countries may have seen rising costs or currency value increases which would also allow wage increases.

Basically an agreement is formed about how much money in total salaries can be increased by in the export sector. Say it can be increased by 1 billion. Individual unions would then negotiate on how much of this pile of money gets allocated to salary increases for their members.

Non-exporting industry and the public sector is then asked to keep their salary increases in line with the salary increases of the exporting industry.

Thus the way Norway has manage to get quite high minimum salaries is because every year there has been some efficiency gains which has allowed salary gains without causing inflation. Each time unions have tended to allocate more of this money toward salary increases for those paid the least. The unions in other words have played a significant part in smoothing out difference over many decades. That is why the Norwegian wage structure is quite flat. It is part of the ideology. It is what Norwegians value and typically have advocated for within unions.

Thus for Americans to suddenly push up minimum wages across the board to say $20 may not be that smart. Instead building up effective union organizations which can strengthen worker’s bargaining power and organizing these unions at at national level allows for long term planning and having an egalitarian profile in how wage increases are distributed.

One can then agree with give everyone an increase each year in line with economic growth but allocate a bigger slice to those with lower wages so that over time the lowest wages are increased.

This can be tailored to industry, so that industries which can tolerate higher increases can have them while those more vulnerable to competition can have lower increases.

But in the short term a federally mandated minimum wage may be the way to do. But long term having a politically decided minimum wage for the whole country is inflexible and not sustainable. It is likely that the minimum wage will end up falling behind again, whenever political realities change. Workers should instead have strong unions to bargain on their behalf to keep wages moving up as the economy grows.

Let me tackle the final myth about minimum wages. There are already various studies which have studied this and found this to not be the case.

But it is worth explaining this from a more theoretical stand point. Obviously if you raise wages for say restaurant workers, you cannot have as many people going out to eat anymore. Would that not mean more restaurant workers would have to be laid off?

Sure, but keep in mind that the general demand in the economy hasn’t really changed. People going to restaurants cannot afford to go as frequently. But people who work at restaurants now have more money to spend and will cause increased demand in other areas, causing a hiring in other industries.

The key thing is to do this gradually. If you do a massive increase in salary over a short time. A lot of people may loose their job, before alternative businesses are able to retrain and expand business. Hence gradual shifts are usually preferable.

One could look at places such as Scandinavia, or my native Norway in particular to see what the effects of high de-facto minimum wages are, to understand better how it affects employment.

Norwegians don’t go out eating as much as Americans because it is simply more expensive. It leads to a slightly different habits. Because minimum salaries are higher, one might as well have more upscale restaurants. Relative to North America, Norway has fewer fast food places. People tend to go more to places with porcelain plates, white table cloth and metal utensils (not plastic forks and knives).

Fast food places often use a bit more automation. It is more common with machines you click on for ordering to reduce on the use of expensive labour.

Stores and services tend to outsource a lot more of the work to the customers themselves rather than to employees. E.g. why do you think IKEA is all about self assembly? It is to outsource the work that would have had to be done by high wage labour to the customer. Scandinavia in general is much more of a do-it-yourself culture for this reason.

In hotels people don’t carry you luggage. You do that yourself. In the grocery store, you pack your bags yourself, to safe time for the cashier. To safe further time, machines are usually used to accept payment. The cashier doesn’t handle it.

Self checkout is widely used, to cut down on labour hours needed. If you go to something like an electronics store, it will feel understaffed by American standards. You often pick a queue number to get help. In a big store it is unlikely that some sales representative will pop up immediately to help you. Expect to wait a little longer.

Usually you get a ticket number right away and you browse and look at what you are interested in while waiting for your turn to be processed.

The positive side of this is that, all these kinds of choices increase productivity per worker. Ultimately it is productivity which makes it possible for a worker to have a high salary or for an economy to generate a lot of income per citizen.

In general very low skilled labour such as carrying bags, suitcases, packing them etc is done to a much less degree in Scandinavia than in the US, because people are not willing to pay Scandinavian style wages for those sort of services. But of course money save not paying for those services is available for other services.

Norway e.g. probably has a lot more people employed in the health care sector to cover more people as well as in child care. Very few mothers are stay at home. So a lot more people are needed in child care. While a stereotypical job for young people in American movies is working at a fast food place, in Scandinavia a stereotypical job for a young person is actually working at a pre-school watching small kids.

In short there is not reason to believe higher minimum wages will lead to unemployment in the long run. However it is highly likely that it will lead changes in people spending habits, activities and structure of employment.

It will cause a shift in prices of different goods and services which will cause a shift in people’s spending habits which again will cause a shift in where people are employed.

E.g. your fast food burger may end up costing more. However dinner at a fancy restaurant may not change much in price, because their salaries may have already been above minimum wage. Thus you may decide to go out eating slightly less, but eat at a nicer place when you go out eating.

Oh and yes you may have to pack the bags yourself.

Written by

Geek dad, living in Oslo, Norway with passion for UX, Julia programming, science, teaching, reading and writing.

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