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Raising the Minimum Wage, the Quintessential Populist Promise

By: Rafael Ruiz Velasco - Dec 25, 2016, 10:29 pm
¿Qué pasa si alteramos el orden de los factores en la ecuación y formamos un nuevo refrán? ¿Qué pasa si ahora decimos “no hagas cosas malas que parezcan buenas”? (Posta)
What if we alter the order of the factors in the equation, and make a new saying? What if we say “do not do bad things that look good,” instead? (Posta)

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“You are to avoid things which appear wrong even though they may not be wrong.” This is a famous popular saying of Latin American culture that invites you to avoid unnecessary problems when attempting to carry out some action or initiative that might seem negative or suspicious, despite it may have good repercussions for the people involved.

What if we alter the order of the factors in the equation, and make a new saying? What if we say “do not do bad things that look good,” instead?

Not only it makes much more sense, but at the same time, the phrase becomes much more relevant because of its high level of applicability.

While in the first case it may seem that we are doing something wrong, but our intentions and goals are actually good, the exact opposite happens in the second case: we disguise (consciously or not) of goodness what is in fact bad or harmful to those affected.

There is no better way to exemplify this approach in economic and political matters than the widely discussed — and for some, urgent — issue of the “minimum wage” regulation.

This proposal intends to use the regulatory and punitive power of the State to allegedly prevent workers from earning less than what is strictly necessary to cover their basic needs.

“We will raise the minimum wage” is the ultimate proposal of the most populist politicians. It is also the simplest way to deceive those most in need, playing with their illusion of an increase in their income and, therefore, their purchasing power, and their standard of living.

What those who promote and believe in such policies forget is that the economy is far from being magic. That is, it takes much more than a magic wand (or the pen of a “magician” legislator, in this case) to generate a real improvement in the living conditions of the individuals that make up a society. The only way to increase wages is through increased productivity, economic freedom, competitiveness between companies and individuals, and new investments.

Otherwise, Nicolás Maduro and the sad situation of Venezuela would be global examples of good policies and economic progress. Maduro is constantly raising the salaries of workers by up to 50 percent without any economic justification, given the high political pressure and social instability in the South American country.

When we analyze the countries with the best minimum wages in the world, we come across a curious fact: many of them have a minimum wage of $0. In other words, the State does not regulate a minimum wage, and leaves this task to free association and to voluntary agreements that arise between private entities.

Bahrain, Denmark, Finland, Iceland, Norway, Singapore, Sweden, and Switzerland are the main examples of countries with no regulatory policies for the minimum wage. Yet they are among the countries with the greatest economic progress in general*.

Following the example of these countries, and according to the Index of Economic Freedom that the Heritage Foundation publishes annually, the recipe is clear and infallible: greater economic freedom brings greater investment, greater competition, and higher incomes. Therefore, this generates a better standard of living, and greater possibilities for individuals to access basic services and economic benefits without having to depend on the State.

Establishing via decree a high minimum wage is counterproductive to a country’s economy. It ends up creating what in public policy is known as the “cobra effect.”

As a first consequence, taking into account the labor force is more expensive, entrepreneurs are forced to seek technological substitutes for their employees, and lay off a part of its personnel. Thus, they generate unemployment and more adverse conditions for people with a lower level of specialization.

In addition, like every cost in a production process, these salary increases will be reflected in the final price of the goods and services, and not in a decrease in the profits of the company (a situation equally undesirable) as many claim. This can only have one macroeconomic consequence in the short term: inflation.

To top it all, not only would we be generating unemployment and inflation, but we would be promoting the flight of capital by forcing companies to move to countries with greater economic freedom, where they are not forced to arbitrarily pay wages that do not reflect the productive reality of a country.

In this vein, the famous Spanish economist Juan Ramón Rallo asks hypothetically: What minimum wage we would impose on our worst enemy? Would it be a low one, so that he could move freely in the labor market, or would it be so high that the companies would not be willing to pay to him, even if he had the most specialized knowledge of the world?

Raising the minimum wage sounds good, and it may seem a fair cause focused on the poorest. In reality, however, it is just another populist proposal that, far from improving the lives of citizens, only contributes to increase the earnings and popularity of those politicians who pretend to be “defenders of the people.”

In Mexico, no political party is safe from this. They all seem to want to over-empower the State at the expense of the individual freedoms of its citizens.

Mexico currently holds position #62 in the Index of Economic Freedom. There is not a more efficient and impartial way of measuring national economic progress than paying attention to this type of indicators. Everything else is nothing more than demagoguery. The numbers are not wrong.

*It is highly remarkable how the Nordic countries are the favorite example of those who promote greater State intervention as a measure of economic growth when they talk about issues such as the welfare state or progressive taxes. However, they completely and systematically ignore their free market policies such as the deregulation of the minimum wage.

Rafael Ruiz Velasco

Rafael Ruiz Velasco earned a degree in Business Admininistration from the University of Anáhuac in México. He's passionate about development, project management, soccer, economics, and comic books.