The Minimum Wage as Maximum Trouble

McDonald’s just announced a wage increase for its employees to ten dollars per hour.  But the reaction was not gratitude but protests by union-led workers who are advocating for fifteen dollars per hour.  The debate on the wage rate is tied to the equally contentious debate about inequality of income.  I am not wading into the inequality debate again now but will focus on the minimum wage issue.

From the start I want those on the other side to understand that I, like you I hope, want to achieve economic well-being for as many as possible.  I am sympathetic to those who say that poverty still exists in the world and even to an extent in the United States—though much less everywhere than just twenty years ago.  So if you are a socialist, a modern liberal, or just someone who thinks we need some way to help those less well-off, I hear you, at least in the economic realm.  Where our fundamental disagreement comes is in our respective proposed solutions to the economic problems.  On the minimum wage issue, I hope to persuade you here.

Let’s start by posting two possible situations for an effective wage rate:

  1. The effective minimum wage is set by the government.
  2. The market sets wages (that is, each firm sets wages based on supply and demand).

These represent the respective solutions (usually) for the Left and the Right ideologically.  If we actually want to help the poor and less well-off, without “killing the goose that lays the golden egg,” what should we do?  First, take the government-established minimum wage.  The activists want a $15/hour wage rate.  If they get it, what will it do?  For those actually employed, it will make them better off.  But who will be employed?  That is what numerous economic studies have tried to make clear.  The results  show that when the wage rate is set too high, through political demand, all those employees who were being paid below that wage are now potentially in trouble.  Employers don’t just pay workers arbitrarily.  The wage rate is set based on the type of work, whether it is skilled or unskilled, as well as how much is necessary to attract enough workers at that wage rate.  The wage is determined then in part by the kind of work—how much training, attention to detail, basic skill, is needed.  If a job doesn’t require much skill, then it won’t pay much compared to other jobs.  But on the other hand, there may be a good many people who don’t have many skills and who could get those jobs at the wage set by the company.  When a minimum wage is imposed, the firm will see that some or many of those jobs now are not worth keeping, because the productivity is less than the cost of the wage paid.  Who is most affected?  Studies show that teenagers are most affected, as they have few skills as of yet in life.  Among teenagers, black teenagers are even more affected.  Now someone will, say, well, isn’t it only fair to make firm pay the higher wages?  But if the company kept the workers paid the higher wages, given that profit is often only about 1-3% and wages make up say 33% of total costs in restaurants and other service industries, its profit would go to zero or below and it would then close.  All employees would lose their jobs.

So there are two scenarios.  Lay off the lowest-skilled workers whose wage now is zero—when it could have been something substantially above zero.  Or pay the higher wages to all, lay no one off, and go out of business, in which case the wages of all employees is not zero.  Does that help?  Only the employees who are able to keep their jobs at the higher wages are actually benefited.  But then do we care about those unemployed?  I hope so.

Now let’s visit the market.  Let the market set wages, without governmental interference.  The firm can now set wages according to the job skills required and actually be able to employ more people, though some at fairly low wages, for very unskilled jobs.  Low wages are better than no wages, unless of course one thinks that welfare payments would provide more, in which case the taxpayers are now paying for what could have been a real job for a real person paid by a business.  Moreover, that person could have been given the opportunity at the lower wage to develop skills needed to move up or simply just to become a more responsible individual.

Which of those two possibilities is better?  The answer is obvious.  What are the objections then?  Well, some simply don’t believe that minimum wages create more unemployment or underemployment.  I guess we can’t help those people, since they refuse to listen to the clear facts.  Others are blinded their ideology so much that they are willing to accept the wage increase, hoping it will actually work (perhaps a look at Seattle, WA might help here).  Some calculate that they will not be the ones affected by the wage increase—and they may guess correctly.  But the cost to those laid off or never hired is devastating.

Yes, Christian economists want to help real people get real jobs.  But we don’t live in or seek a utopia which cannot be had here on earth.  So the solution is not to make it impossible for low-skilled workers to get jobs, but to enable as many as possible to get them so they can build skills and increase their well-being.  Advocates of minimum wages, or as some might go farther to say, a “living wage,” are in fact living in a false utopia—which is actually what the word utopia means, “no place.”  We cannot allow the minimum wage proponents to claim the moral high ground.

7 thoughts on “The Minimum Wage as Maximum Trouble”

  1. I like how you look at the facts of economics and what will make our nation better rather than to try and seek approval from everyone! Great article!

  2. “When a minimum wage is imposed, the firm will see that some or many of those jobs now are not worth keeping, because the productivity is less than the cost of the wage paid. ”

    1. You are begging a critical question here. Currently, there is NO clear correlation between wages and productivity. BLS data make that point clear: productivity has increased at a rate far above wage growth [as measured by average inflation-adjusted hourly compensation] since the mid-1970’s. Much of the gain in productivity has not gone to the workers but to the owners/mangers, and this trend has exacerbated the gorilla in the room that many do not want to talk about–rising inequality.

    2. The multitude of studies done on the topic do not point to any clear statistically-significant correlation between the growth in the minimum wage and growth in unemployment. I remember reading Hazlett’s Economics in One Lesson in Uncle Al’s course and reading about how minimum wage laws contribute greatly to unemployment. I am glad I read Hazlett, since it has made me realize about the major shortcomings of an a priori approach to economics.

    3. It is easy to mock activists who want higher wages, but, seriously, what is the solution?

    Conservatives decry unions and seem to assume that the owners will simply give living wages out of the goodness of their hearts, that there is no need to speak up, even via non-violence. Meanwhile, as unions have declined in this country, productivity gains are NOT going back to the workers. The data make this quite clear.

    4. It is easy to forget that we taxpayers end up paying much of the cost in the form of public benefits to workers who have full-time jobs–and likely work very hard in sometimes very dangerous jobs–and yet do not make enough to cover basic living expenses.

    Many who earn minimum wage are NOT teenagers looking for pocket change (and so what if they are, since today’s teenagers will be tomorrow’s university students who pay upwards of $30-40K a year).

    Coupled with the fact that most states have regressive taxes in the form of sales taxes (sometimes even on food), workers are getting hit from both sides.

    Those who decry public benefits at all should get off of their high horse and be aware that such a position can posit what many would consider an immoral Social Darwinian point of view.

    If there is dignity in work, which there is, shouldn’t workers who play by the rules (and do not sell drugs, or practice prostitution, or steal) receive some dignity?

    If we are not willing to pay the price to value the labor of others, what is the alternative? Sloth? Crime?

    Seriously. Are we willing to pay more taxes in the form of police protection to protect us from those who commit crimes in order to make it?

    Are we prepared to pay the price of other unintended consequences from economic policies that sound good in an ivory tower but fail the data test in the real world?

  3. I appreciate the arguments of your article, as well as your effort to include possible opposition from other viewpoints. I agree that some (if not many) low tier workers will actually be hurt by a significant minimum wage workers, because the value they are able to provide through labor will be lower then the minimum wage. It will be interesting to see in future years if there is a significant wage increase, and if so, what the impact on unemployment will be.

  4. First off I would like to ask for forgiveness in the case that my thinking happens to be superbly flawed as I am wondering why my thoughts have not been brought up yet. I know I do not yet possess the education of many of the people who I have seen comment on this blog but I nevertheless will share my opinion and I hope for an educated answer back.

    I understand that to stay in business companies have to make a profit and that if they have to pay lesser skilled workers a higher wage than the workers deserve, that makes staying in business and maintaining a profit hard. The way I see it is that this gives the business two options. The first one (as mentioned above) being to lay off workers. I feel the other option is to raise prices. This makes sense to me because if everyones wages are being raised then they have more money to afford the new higher price. I see this as being a likely conclusion for companies, I also see that if this scenario were to take place it would be as if nothing happened. Wages would go up and prices would go up. The market would simply have a very fast growing inflation.

    My question plainly is: is this possible and is this likley? please tell me what you think?

  5. I agree with the comments you made. I think there’s a reason that higher wages are tied to higher skill levels. I also think that every person in a “lower position” has the opportunity to succeed and then be promoted. The promotion would result in needing more skill, resulting in more money. There’s always opportunity to make more money… I get the feeling that society as a whole wants to be paid a lot for doing very little. Further, people respond to incentives. What incentive is there to do well and get a promotion, or a bonus, if people are getting paid $15/per hour to fry food and sell it?

  6. I feel as though individuals in favor of a minimum wage hike are making an impetuous assumption about those working minimum wage jobs. They make the assumption that all of them are living on their own and are adults.

    Look at the numbers. Most of those making minimum wage (which is a small fraction of the country) are NOT the head of household, i.e. a large majority of these workers are teenagers. A small fraction of minimum wage workers are single and surviving off just their income.

    Also, the argument for an increase of the minimum wage because companies like Wal-Mart can handle the blow is simply disregarding the facts. Yes, the Wal-Mart’s, Targets and GE’s of the world can handle an increase without affecting them too much. It would require the CEO’s and top executives to reduce their multi-million dollar incomes just a little bit.

    But what group is the minimum wage hike going to hit the hardest? Small businesses! Yes, those same small businesses that make up 50% of the working people in America. Those small businesses are not hauling in “Wal-Mart-like” numbers every quarter. They make respectable incomes, but not necessarily millions.

    Look at what is happening in Seattle… small businesses are dropping like flies because of the mandatory $15 wage hike. (Side note: this hike only went into effect on April 1st… imagine what it will look like a year from now.)

    The stats are there. The American people just need to look towards the future impact of policies we ask Congress to implement. Sometimes what seems helpful for the American people on the surface is not always the most logical.

  7. Perhaps, the biggest issue with low minimum wages is that it doesn’t allow low skilled workers to get jobs.

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