Over decades the idea has grown that the collective is responsible for arranging ‘morally justifiable’ wages. Supported by an expanding world of services it has become more difficult to directly attribute performance to payment. But even then, differences in wealth stimulated the eruption of groups that are bundled bargaining powers. Today, we see that the minimum wage results in losses of jobs.

The arguments from groups that represent employees (ranging from labour unions to labour governments) have focussed on the beneficial effects of higher wages on consumption. They argue that a higher disposable income leaves workers with more to spend, which in return should lead to more production (i.e. economic growth). It sounds a little too much Santa Claus like though.

Individuals (you, me, factory workers, presidents) can only survive when we feed and protect ourselves. Food and protection do not originate from nothing. Like animals we have been hunting for ages. We have also constructed our own huts and homes since a long time. Those who were unable to feed or protect themselves died. Food and protection seem to require a proactive attitude.

As our societies advanced (i.e. we could better protect and feed ourselves) we brought in specialisation and money. We agreed that some of us hunt for food, some make homes and others e.g. produce computers. We then traded those goods at a price. Let’s say that twenty rabbits would suffice to trade for a horse carriage. And As I do not need a new carriage every year, I can trade these rabbits for other goods the next year.

As we produced relatively less perishable goods (our joint production included more non-perishable goods like washing machines, cars) we thought that a commodity should become a means of exchange. Later this developed into the present day system of money. At this stage my twenty rabbits are not traded for a carriage, but I get a money value instead. Money facilitates trading as it makes it more flexible.

As you can see, I always need to give in order to obtain a trade. If I would have demanded two carriages for my twenty rabbits the buyer would not have wanted it. If I would have tried to force a deal with him (her), he would have looked for protection against my aggression. For me, this would have meant the end, because nobody would want to trade with me anymore.

Due to abundance of tradable goods money has become ‘anonym’ in our time. Its meaning became detached from what it represents and opportunity costs seem to be ignored. The focus is on obtaining. Workers demand to be paid ‘equally’. They argue that they are entitled to receive a certain amount of tradable goods without offering something in return. This artificial rise in remuneration of work creates an unbalance.

By demanding higher wages workers implicitly oblige you to pay more for the goods that you buy. This leaves you with a lower disposable income, and you can thus save or consume less than before. You will not get anything in return for this. When it comes at the expense of our savings, it is the destroyer of future investments (less savings, higher interest rates). When it comes at the expense of consumption, it also affects future investment.

An often heard argument is that consumption is being shifted from one group of consumers to another, i.e. minimum wage workers, and that the effects of higher minimum wages are neutral. This assumption is false. Suppose you earn an income that is twice the average, and you are confronted with the aforementioned increase in prices. On what goods will you cut down? Right, on those that are most advanced and have high prices and profit margins. A minimum wage worker on the other hand, spends relatively a lot on ‘lower margin’, and thus less advanced, products. As you can see more advanced products are substituted for less advanced, and in the end production of technological advanced goods declines.

Entrepreneurs, facing these rebellious employees, will shift production abroad or replace workers by machines. Companies tend to go to places where they can resume production at the ‘right’ prices and keep up their commitment to customers. In the end, workers will be left without jobs and allocation of inputs will be displaced.

At the beginning of the 21st century we are blessed with and cursed because of the welfare we enjoy. We are blessed as we are not dying of illnesses or starvation. We are cursed on the other hand because we have taken it for granted. We have lost sight of how the orchestra jointly produces music. As with everything in life, when you take more than you are willing to offer, eventually the relationship or trade will break down. Those arguing for increases in the minimum wage will be hit hardest in the end. Unfortunately, they force us to go down with them.