Why Are Wages So Low

Last week, we talked about the capital consumed by Netflix—$8 billion to produce 700 shows. They’re spending more than two-thirds of their gross revenue-generating content. And this content has so little value, that a quarter of their audience would stop watching if Netflix adds ads (sorry, we couldn’t resist a little fun with the English language).

So it is with wry amusement that, this week, Keith heard an ad for an exclusive-to-Pandora series. The symptoms of falling-interest-disease are ubiquitous.

Consumers love it. And why shouldn’t they? If a farmer throws a lavish feast to eat his seed corn, of course, the revelers will praise him. As free-marketers praise the plethora of consumer products such as the iPhone and the all-you-can-eat Netflix video buffet. They believe these products are the benefit of capitalism. They’re not, of course. We don’t have capitalism. We have central planning of interest rates, and these phenomena are a product of this central planning.

So this week, let’s move to a different topic: Why are wages so low?

The Great Wage Controversy

The Left frames this in collectivist terms. They speak of the “share” of wages, always reverting to their Marxist zero-sum view. They think of the economy as a pie, and therefore capitalists are getting more as workers are getting less. So they want to force employers to pay more (which will be a disaster, for all the reasons discussed in our many writings, plus many more). And they want both a higher tax rate on income and profits, as well as a wealth tax. Socialism seeks out capital and targets it for consumption.

The Right mostly denies that wages are falling. Indeed, they say wages are rising. “Look! Unlimited movies on iPhones!” They’re eager to head the Left off at the pass before they can enact more taxes and hike the minimum wage.

The gold community sees this issue clearly. Here is a meme we encounter frequently on social media.

If the minimum wage today were 1.25oz of silver (i.e. $17.86 at Friday’s close), workers would be doing well. If we still had an honest monetary system, based on gold and silver, would the wage have remained this high? Maybe. At least, the drop in wages would be more visible.

Keith wrote an article for Forbes: Measured in Gold, the Story of American Wages Is An Ugly One. In 1965, the unskilled minimum wage laborer made 71 ounces of gold per year. In 2012 (the last year of data available when researching for the article), a senior engineer earned 63 ounces. This is a fact, anyone can do the math. Yet it is so counterintuitive that most people want to argue against it.

Measuring Wages Using Rubber Band Dollars

The point of the article is that—using the dollar to measure them—both prices and wages are rising. People complain only when wages do not quite keep up with prices. We propose an analogy to jumping out of an airplane. You are in free fall, and unfortunately, your parachute kit is falling separately from you. Since it has greater drag, it is falling at a slower rate than you. As the parachute goes out of your reach, you utter words out of frustration.

“My parachute is going up.”

Obviously not. But this line of thinking raises a question. If it really were as simple as rising quantity of money causes rising prices causes loss of purchasing power, then wages and prices would go up at the same rate (no, we’re not interested in the Marxist argument that employers hold back some of their gains from inflation, that markets don’t work). But wages are not rising at the same rate as prices. So there must be another factor at work to cause them to diverge.

Think Spread, Rather Than Price

Diverge? Divergence! This leads us back to one of the most important concept of economics: spread. The spread between wages and prices is widening. Ever since that Forbes article, Keith has been meaning to come back to the topic and address a broader principle.