How Minimum Wage and Welfare Help the Rich: Where’s the Profit Go?

Following up on yesterday’s post on the “potential” and “kinetic” energy of economic activity:  We’ve got a business, as part of a larger industry that has made a radical shift to automation; let’s say it’s a grocery store that no longer has people doing most of its work.

The business is now saving by not having to pay a large workforce minimum wage or better, plus government-required benefits like payroll taxes and (soon) healthcare.  Instead, it pays a handful of technicians (probably capable of covering multiple stores in the chain) a better salary to keep the machines functioning smoothly.

The day of the change, people are still willing to pay the same prices for the food on the shelves.  In other words, the margin between the price that can be charged and the cost to provide the service has expanded dramatically.  The question is: Where does the money go?

Myriad factors will determine that direction.  One big one, though, is the public’s willingness to continue paying the same price for food.  In this regard, obsessing over dollar-amount handouts as a social safety net means that the system is geared toward keeping prices at their current level, which ultimately benefits businesses that could lower their prices.

As people are displaced from their jobs by automation, the government redistributes money to them.  If they’re at least mildly prudent, the majority will spend that money on essentials, like food, first.  That keeps the price of food up.  If the subsidy weren’t there, economic and social pressures would push the price of food down, because making a smaller profit as a grocery store owner is better than going out of business because nobody can afford your product. (Note that I’m writing broadly to convey a point; starving people to adjust prices would not be good public policy.)

(Next up: competition)

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