Horses and the Minimum Wage

The world’s horse population is estimated to not exceed 65 million, while the world’s population of people is estimated at 7.05 billion.  We have at least 108 people for every horse.  It wasn’t always thus.  In 1800, Europe’s estimated horse population was 14 million, while its people population was an estimated 150 million.  They had about 11 people for every horse.

The industrial revolution caused the horse’s relative decline.  In 1800 horses were a big part of the economy.  They powered most overland travel and lots of manufacturing, and they were critical to agriculture.  Today, horses are a luxury good, providing entertainment and sport to those who can afford their high cost.  In economic terms, the marginal value of a horse’s work became less than the costs of feeding the horse.

At the time, people worried that the industrial revolution would also put people out of work, but unskilled workers were a major beneficiary of the industrial revolution, as unskilled wages rose relative to skilled wages.  That could be changing, at least in the United States.

For the past decade, less-educated workers’ wages have dramatically lagged higher-educated workers’ wages.  This is a result of globalization and technology.  In their book  Race Against the Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, Erik Brynjolfsson and Andrew McAfee argue that we may soon put not just unskilled but skilled workers out of work.

Is that a boon or a curse?   We could say that it’s a boon.  Output, even on a per-capita basis, would go up.  So, there is no reason for anyone’s consumption to go down.  In our economic models we model agents as optimizing across leisure and consumption.  If consumption goes up and leisure goes up, it’s all good, right?

Wrong.

Our models don’t take into consideration that jobs give people something besides the ability to consume.  Jobs give people purpose, discipline, dignity, and self respect.  People without work are different, even when their consumption needs are fully provided.  Communities where consumption is provided and jobs are absent are characterized by serial and abusive relationships, high rates of crime and substance abuse, violence, poor health, low educational attainment, and early and frequent pregnancies.  This is true even when healthcare, birth control, and educational opportunities are readily available.

We would have a problem if people were put out of work, and it would be more challenging than the horse problem.  When we had more horses than jobs for horses, the horse population was adjusted.  That won’t happen with people.  Outside of a slave society, nobody is going to compare the cost of feeding a person with that person’s output, killing the person if the costs turn out to exceed the output.

The situation would necessarily lead to high tax rates on capital and subsidies for the unemployed.  However, something has to be done to improve the incentives in our current safety net.  Otherwise, we are left with a large and growing population of subsidized people who will never be employed, and all the problems associated with such a population.

One solution is to eliminate the minimum wage and boost the market wage with a negative income tax, one structured in such a way that the minimum amount a worker would receive would meet a socially acceptable standard of living, and one where beneficiary never faces high marginal tax rates.

As long as capital and labor are substitutes–and this must be the case if capital is replacing labor–labor will have a positive marginal product.  This means that there will be a positive, but perhaps very small, wage associated with the labor.  A job, with all its non-pecuniary benefits, would be available.

The resulting situation would be far superior to the current safety net where our poorest routinely face marginal tax rates in excess of 100 percent.  The taxes on capital would be lower than those that would be required with a safety net patterned after our existing safety net, because we would avoid the costs associated with persistent unemployment.  Most importantly, the personal costs absorbed by the persistently unemployed and their families would be avoided, because they would be employed.

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