Saturday, May 10, 2014

Why Raising and Fixing Minimum Wage is such a poor Idea

Rule of 10, 12 or 20
Often we hear talk of raising the minimum wage in different economies of the world. The people who ask for this are those who have got trapped  into an exploitative economy where a few control most of the wealth and raise the minimum wage of the poor from time to time as feudal lords used to raise the salary of their servants and slaves from time to time. What needs to be addressed instead are income inequalities but those can be done by controlling the maximum wage not just the minimum one. Raising minimum wages could cause maximum wages to rise faster increasing inequalities further and inflation could erode the value of minimum wage even if increased as has happened in many countries. One might say that raising minimum wage could reduce inequality. but  that is a poor way to go about it. There is a far better way that has something to do with a ratio as explained next. It is not an advanced concept. Elementary school children learn about it in arithmetic nowadays. Whenever minimum wages are raised but no caps of any form are put on the maximum wages it is mere appeasement and a travesty. It permits senior executives to take away a huge chunk of profits as salary, bonuses and various other benefits, profits that would have been shared with the shareholders and all employees or used to expand and strengthen the business. When the business fails the public may  pay again for the bail out perhaps. The UK public paid a third time for one of the bailed banks when it was fined millions for wrong doings. It was the bank that paid the fine but the bank was with the public by now so it was the public paying the fines. Those who had committed the wrongs were relaxing in their mansions with the help of millions in severances packages they took when they left.

Fixing a minimum wage is most detrimental to a new small business or even a large struggling one. It can lead to collapse of the business as it does from time to time and everyone ends up losing then. Better have a low wage then end up on the street without a job. If the economy or a business organization improves all would be helped and the minimum wage would automatically go up provided one understands how to use something called a ratio. When ratios are fixed senior executives have to raise the minimum salaries in an organization if they want their own salaries increased.

It is not suggested that incomes of all should be equal as some communists did. That kills incentive to work and even the trees in a forest are not all of equal size. Some inequality is natural but it is not natural to have a million feet high tree in the forest either.
Rather what is suggested is that there must be some reasonable ratio of the maximum and minimum wages within each organization say ten, twenty or thirty times at the most. This will permit small businesses to grow starting with a low wage for everyone from cleaner to CEO and also permit struggling industries to survive through lean periods by cutting benefits of all across the board. It would also prevent greedy bankers from running away with the profits or gambling too much with other people’s money in the hope of a bonus. Such a proposal under the name of rule of ten was proposed by this blogger a few years ago and has been enthusiastically examined by many Europeans.

The reason why some forms of communism failed is because it was sought to impose an unnatural equality on the masses. The reason why many forms  of capitalism are struggling and reeling under debt, stress and homelessness is because an unnatural inequality has been permitted to flourish. The solution is the middle road. If they can walk it in Sweden while merrily singing the song of prosperity so can the others because Sweden is not a planet in a galaxy far far way.

You can read more details of the rule of ratios here

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