Wednesday, May 24, 2006

No Free Lunch at Microsoft

Yesterday as I was coming out of the local branch of the Tucson Public Library I was approached by a person gathering signatures for petitions and asked if I would sign them. All of them dealt with issues that various special interest groups want to have included on the November ballot. Since none of them were issues that I am in favor of seeing enacted into law, I declined to sign them.

One caught my eye and that dealt with an issue that certain groups in Tucson have been pushing unsuccessfully for quite a while and that is raising the minimum wage in Tucson. From a strictly selfish point of view, I probably should have signed that petition. Like anyone with any knowledge at all of economics and how an economy works, I know that raising the minimum wage has the effect of reducing the labor force as employers layoff marginal workers whose output is less than the new wage. To replace the lost output, these employers have to turn to more automation and this increases the demand for people, like me, with the skills needed to design and run these new systems.

However, in addition to not feeling right about advancing on the misfortune of others, I am the father of four children, three of whom are just entering the labor force. My oldest, started part-time work at minimum wage when he turned 16. In the six years that followed, and with no more than a high school education (his choice, not mine), he has advanced to over $13.00 per hour – almost twice what those in favor of increasing the minimum wage are proposing.

Just as the Ritenour article which was the reading assigned with Assignment 1 for my ECN 202 class this spring) described, when my oldest son was earning minimum wage he lived at home with all of his basic living expenses (including medical insurance) taken care of by me. His income went toward his car, electronic gadgets and partying. After completing high school and working his way up to $13+ per hour he elected to move out and began supporting himself.

My three younger ones, who are still in high school and college, are working part-time at minimum wage jobs. However, their food, shelter, medical expenses (including insurance) and education expenses are covered by my wife and I. In an effort to induce a little reality I have started charging them $30 each (when they are working), but, instead of using it to defray the expense of supporting them, I have opened IRAs (Individual Retirement Accounts) for each of them and deposit their $30 into these accounts.

While my children tend to be the norm for people earning minimum wage, I realize that there are some people who have to support themselves and, in some cases a family, on minimum wage. However, I have yet to see how they are helped by a law that results in the loss of their job. I don’t see how a person struggling to support themselves on a minimum wage are made any better off by reducing that wage to zero.

The expression there is no such thing as a free lunch is more than just a quaint saying. It contains a profound economic truth and that is that nothing is free. If the college decides to provide free meals in the cafeteria as a benefit to instructors the meals would cost the instructors nothing and, from their point of view, would be free. But someone would have to pay and the net result would be that either the taxpayers would have to pay through higher taxes, or the students would have to pay through either higher tuition and/or higher prices for meals in the cafeteria.

Today’s issue of Redmondmag.com provided a very clear example of the no free lunch concept. It seems that two years ago financial and competitive pressures forced Microsoft to eliminate free sodas, free massages at work and other employee perks common in high tech companies during the dot com era. Now, in order to keep the highly skilled workforce needed to compete against the likes of Google, Microsoft is being forced to reinstate many of these perks. This move is an investment by Microsoft which they hope will pay off with higher sales in the future. But, like all investment, the money has to come from current consumption which means that some group has to receive less in order for the Microsoft employees to receive more. For the current fiscal year (which, for Microsoft, ends on June 30th) the new perks just given to Microsoft’s full-time, regular employees will be paid for by Microsoft’s large body of contract or temporary workers in the form of an involuntary and unpaid seven day leave of absence (i.e., a seven day layoff). Microsoft apparently chose to place the burden on this group rather than making its stockholders (a group that includes multi-billionaire Bill Gates as well as mutual fund companies managing retirement accounts for minimum wage workers like my three youngest children).

While idealists can argue forever about how best to distribute the burden of a transfer of income or wealth from one person or group to another, the fact remains that, except for increases in productivity (which actually increase the size of the economic pie thereby making more available for everyone), there is no way to make one person or group better off economically without making some other person or group worse off. As Milton Friedman kept emphasizing to his students and TV audience

THERE IS NO SUCH THING AS A FREE LUNCH!

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