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.