Friday, May 2, 2014

Rise In Minimum Wage Will Result In More Self Employment

There's been a lot of discussion recently about pushes to raise the minimum wage. Although I'm personally against the government telling people how to run their business, I'd like to make an unbiased prediction about what will happen if these $15 dollar minimum wage laws are actually enforced. I will be talking about an immediate response instead of a long term, 5 year inflation / wage adjusted world.

The way I tackle problems is that I take something to the extreme, and look at what would happen. If something is a good idea to do, then you shouldn't half-ass it. Let's pretend that the minimum wage was raised to $100 per hour. This makes hiring impossible for just about every imaginable business. But the economy must still function. The world must go on. If we establish what would happen in this theoretical $100 dollar per hour world world, we can hypothesize that some of the effects might show up in the $15 dollar per hour world.

Let's say John owns a restaurant and he needs to serve burgers. However, John can't afford to pay the cook $100 per hour. Let's say Sam is a cook. He would love to have a job, but he's not legally allowed to work for less than $100 per hour. So what could happen? Well, John could call up Sam and order 50 burgers. Let's say it takes $2 for the ingredients to make a burger. Let's say that we imported the ingredients from a country which does not have $100 per hour minimum wage laws because it's unlikely that we could buy those ingredients in the US after the wage hike. Let's say John and Sam negotiate and Sam agrees to sell each burger to John for $3. John buys each burger from Sam for $3 dollars each, so that Sam can make a profit.

John has now paid $150 for 50 burgers. Sam has a $50 dollar profit. The likelihood is that Sam probably spent a lot more than half an hour to make 50 burgers. However, by "contracting" the work, John has been able to have his food cooked for less than the minimum wage laws required. Effectively, Sam is self employed, which is the only reason that he is allowed to pay himself less than the minimum wage.

To make things more efficient, John could rent out the kitchen of his restaurant to Sam. After all, what good is a kitchen if you can't hire a cook? It wouldn't make sense for Sam to run to his home to cook up the burgers every time they were needed. You could end up with 2 independent businesses in the same restaurant, where the livelihood of both business is very tightly bonded.

I've recently come across a website called Task Rabit. Basically, you post a task (mow the lawn) and the maximum amount that you're willing to pay to have the task done. If you wish to take the task, you would bid your price. If you really needed to make some money, you could underbid someone else to take the task. Reviews would allow the employer to see how reliable the "rabbit" is. The "rabbit" would come to your house, mow your lawn, and you'd pay him the specified amount. What occurred to me was that time is usually not part of the description. The task might mention that your lawn is 300 sq ft, but it does not specify how quickly you must do it. You get paid the same amount, regardless of how inefficient you are. Clearly, someone who is more efficient would be willing to do the task for less. Someone who only needs 15 minutes to do something would likely be willing to take a little less money than the person who needed 2 hours to do the same thing. At the same time, someone who is more desperate for cash will be willing to bid less also.

What I've noticed is that you can estimate how many hours of work you would need to put in to perform some of the tasks. What I've also noticed is that the bids will often result in getting paid less than minimum wage. What that means is that in order to win some of the tasks, you have to offer to work for less than minimum wage. The reason is because you're getting undercut by people who are unable / unqualified to obtain a minimum wage job.

I suspect that this is what will be happening as higher minimum wage law arise. More sites like Task Rabbit, variants, specialty tasks, will pop up. More services like these will enable people to self-employ in order to get around minimum wage laws. No, I don't need proof or research because what I see in Task Rabbit is already reality. And honestly, I'm not interested convincing anyone any further than what I've already described. People are already self-employing and paying themselves less than minimum wage via Task Rabbit. I imagine this type of activity would only increase as minimum wage rises. What I'm trying to figure out right now is how to make money off of this. I haven't though of how yet, but I hope I won't be late. I would greatly appreciate any ideas in the comments.

2 comments:

  1. Wages, prices and profits are all value signals. They are supposed to help us figure out how to best allocate our resources. The more the government distorts the value signal for unskilled labor...the more demand there is for the true signal.

    Adam Smith used the terms "artificial" and "natural" to distinguish between the two types of signals. So we can think of there being an artificial minimum wage (AMW) and a natural minimum wage (NMW). It would be pretty helpful to know the NMW's of every city in the world. Businesses would want to move to where the NMW is the lowest while workers would want to move to where the NMW is the highest. It would also be helpful to show the changes in NMW over time. Perhaps you could somehow pull the information from Task Rabbit and other similar sites. Or maybe you could beat Task Rabbit by virtue of providing the aggregated NMW data.

    Of course, the more successful your site becomes...the stronger the case against AMWs. Your site would certainly help people understand that society shoots itself in the foot by distorting value signals. So if your site was too successful...the government might simply eliminate AMWs.

    Really it's about clarifying demand. Here's my idea...crowd sponsored results.

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    1. It would be really nice for the government to correct their errors, but it usually does not happen without a crash of some sort. The government was stupidly giving out too many mortgages to unqualified borrowers, and it required a recession to make them stop. Greece is another lovely example of a government who couldn't / wouldn't fix their own mistakes until it's too late.

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