Thomas Sowell: The Obvious Problem with a “Living Wage”

“Wages and salaries serve the same economic purposes as other prices — that is, they guide the utilization of scarce resources which have alternative uses, so that each resource gets used where it’s most valued. Yet because these scarce resources are human beings, we tend to look on wages and salaries differently. Often we ask questions that are quite emotionally powerful, even if they are logically meaningless. For example: Are the wages ‘fair’? Are the workers ‘exploited’? Is this ‘a living wage’?

Such questions seldom get asked about the prices of inanimate things, such as a can of peas or a share of stock in General Motors. But people are believed to be entitled to pay that is ‘fair,’ even if no one can define what that means. ‘Exploitation’ and ‘a living wage’ are likewise emotionally powerful expressions without concrete meanings. If a worker is living, how can he be receiving less than ‘a living wage’ unless he is, as some have said thoughtlessly, ‘living below subsistence’?

No one likes to see fellow human beings living in poverty and squalor, and many are prepared to do something about it, as shown by the vast billions of dollars that are donated to a wide range of charities every year, on top of the additional billions spent by governments in an attempt to better the condition of less fortunate people. These socially important activities occur alongside an economy coordinated by prices, but the two things serve different purposes. Attempts to make prices, including the prices of people’s labor and talents, be something other than signals to guide resources to their most valued uses, make those prices less effective for their basic purpose, on which the prosperity of the whole society depends. Ultimately, it is economic prosperity that makes it possible for billions of dollars to be devoted to helping the less fortunate.

Nothing is more straightforward and easy to understand than the fact that some people earn more than others, for a variety of reasons. Some people are simply older than others, for example, and their additional years have given them opportunities to acquire more experience, skills, formal education and on-the-job training — all of which allows them to do a given job more efficiently or to take on more complicated jobs that would be overwhelming for a beginner or for someone with only limited experience or training. It is hardly surprising that this leads to higher incomes. With the passing years, older individuals may also become more knowledgable about job opportunities, while increasing numbers of other people become more aware of them and their individual abilities, leading to offers of new jobs or promotions. It is not uncommon for most of the people in the top 5 percent of income-earners to be 45 years old and up. […]

These and other common sense reasons for income differences among individuals are often lost sight of in abstract discussions of the ambiguous term ‘income distribution.’ Although people in the top income brackets and the bottom income brackets — ‘the rich’ and ‘the poor,’ as they are often called — may be discussed as if they were different classes of people, often they are the very same people at different stages of their lives. An absolute majority of those Americans who were in the bottom 20 percent in income in 1975 were also in the top 20 percent at some point over the next 16 years. This is not surprising.”

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Excerpted from Thomas Sowell’s Basic Economics, a modern conservative’s primer on money and the market economy.

Below, watch the affable 84-year-old discussing the release of the fifth edition of Basic Economics with the Hoover Institution’s Peter Robinson last December.