A strong assumption is that people have views about the whole income distribution. A simpler assumption is that people recognise a level of subsistence - which for dynamics likely implies that they adjust that subsistence to developments.
The strong assumption might well be that the income distribution is lognormal for social - and not ‘economic’ - reasons, and that the economic process only is oriented at directing people to a fitting place in that distribution. Economic productivity is essentially a nominal concept. It is not just the technical amount of goods per hour that can be produced, but also multiplied by the price of the product, and the price is determined in a social situation where status considerations apply. The assumption that economic agents have views about the income distribution actually need not be overly strong. As Tobin (1972, p122) states:
“(...) This observation led Keynes to his central explanation: Workers, individually and in groups, are more concerned with relative than absolute real wages.”
However, for our discussion, we narrow down the problem to the subsistence or the net minimum wage, and disregard views on the whole income distribution.
Suppose that a group recognises some subsistence. A group even might be defined by its shared views on this. For example, members of a royal family receive a certain allowance that meets their standard of living, and their standard of living helps to show that they are members of that royal family. The view oriented at the inner group thus is linked to the exclusion of others. Others should have less, precisely to distinguish them from the inner group. Being a royal family does not amount to much, if you don’t have subjects. This process works all the way down, so that even people in minimum conditions flatten out differences among themselves, and seem to compare themselves to beings of assumed lesser stature. (So the simpler assumption could be used to build the strong assumption.) This discussion also clarifies that the size of the group matters. There is only room for a national subsistence floor if the simpler assumption allows for a large group. So the simpler assumption properly reads that groups not only define subsistence for the inner group, which is less controversial, but also, more controversial, subsistence for society as a whole.
Note that any assumption, simple or strong, is not sufficient by itself. Society also has the coordination problem of aggregating the individual preferences on national subsistence, particularly since not everyone who wants to raise the living standard of the poor has the personal means to do so. Sometimes there are legal rules. Often labour unions come in. For example in Holland collective bargaining results into industry minimum wages that are on average at least 10% higher than the legal minimum wage. More generally, subsistence is simply a social convention. A certain level of living is regarded as inacceptable, both by most employers and by the work floor in general.
One way to implement a welfare system would be to set social security at B, and leave it at that. There would be no need for a minimum wage, since employers would have to offer at least B. In practice government nevertheless create a minimum wage system too, and allow a gap between the working wage and the benefit. One of the reasons is better control, so that agents are less likely to both receive a benefit and work on the side. One of the other causes undoubtedly derives of the social forces that call for a decent minimum. [82]
Sometimes labour market regulators may be aware of the problem of the minimum wage, and may opt for a lower indexation of M even though it results into a lower B. But the effectiveness of such policies that reduce subsistence depends upon the strength of conventions in all factories and sectors.
It is useful to note that conventions are sensitive to various considerations. For example, the Dutch legal minimum wage holds for fulltimers, but does not hold for parttimers. Holland now has a lot of parttime work. [83] It is also interesting to observe that tax exemption x is established within the bureaucratic realm where there is no direct confrontation with the standard of living. For its own historical reasons, exemption is generally indexed on inflation. These matters, while also being evidence that human care for other people should not be overrated, again clarify that our subject matter is not simple in itself. Subsistence itself is very simple, especially to those who are subject to it, but it can be made complex, especially by those who govern.