Yesterday, the minimum wage was looked at for its pure economics, and the following key points were made:
- wages are just like any price, and that amount is determined by the same mechanisms that determine other prices
- wages are not increased or decreased by employers being nice or mean
- in general, a price on wages is reached by mutual consent, where both the buyer and seller of labor are making a profit
- real wages are raised by increases in a laborer’s skills, education, experience, etc…
- making a wage floor above the value of a laborer’s skills will eventually lead to his unemployment, lower wages for workers still employed and less profit for an employer – everyone loses.
In order to look at the social and human fallout from this obviously destructive practice, many people jump immediately to the laborer’s situation. This is the most identifiable (as most of us fit this category) but actually it is important to first see the broader effects.
The Very General Effects
On aggregate, if the price of labor rises and a laborer’s skills, education and experience do not, then either two things happen. For those who argue that the laborers on the margin just get increases with everyone else, then 1) the company is forced to pay more for a less profitable, or possibly non-profitable employee. The business will fail if they continue this, removing the production of some viable good or service from the market. Or, 2) they will simply fire workers or hire less – also removing services from the market.
These are the most unseen affects, but they are the most dramatic. In both instances there are less goods and services added to the economy. As population increases (increasing demand on these scarce items) this means a decreasing standard of living for everyone, or if the wage increases are much less, probably just less of an increase or a stagnation in living standards.
The Poorest Made Poorer
Now, for the workers, they have a very visible problem in this situation. The people who fetch a labor price below whatever the minimum wage are the more unskilled, uneducated, very young, very old, disabled, unexperienced, untalented or disadvantaged in society. Because their combination of abilities does not produce something worth more than minimum wage, they are effectively banned from legitimate work. Remember the minimum wage law does not say that employers shall raise wages above a certain price; it says that there shall be no work under a certain amount.
This is because raising the minimum wage is like raising a high-jump bar – it’s a barrier one has to get over in order to get a job. Every little bit that it is raised, removes more and more people (and again, the most disadvantaged) from the market. They have no other option but to seek a wage from an illegal market of some kind – usually crime, selling drugs, illegal work or just living on welfare or charity.
The Removal Of Opportunity
Even more sad is that these people, with the training and skills they could receive on the job, even most low wage jobs, would eventually gain enough skills and experience to demand real increases in their wages.
This has been seen with teenagers, who are usually worth less than minimum wages. In fact, many states and counties have made exceptions to minimum wage for teenagers (what terrible child labor exploiters!!) because of this effect. Otherwise, these kids come out of school when they are 18, and many have few skills to offer employers – or, they believe they don’t because they have been banned from first hand experience in the market.
The Humanitarian Myth
Minimum wages are widely popular because these things are either not considered, or even more deplorably – they are ignored. The most helpful thing to the poorest in skills among us is to allow them to work, gain training and make money, rather than sacrifice them to crime or illegal work so that we all can feel better about ourselves. If we truly care about workers on the margin, then we would stop baning them from work, and instead educate ourselves before we start passing laws.
I get the impression that supporters of minimum wages think along these lines: “These workers are worth as much as $10 an hour to their employers, but they’re so desperate for jobs that they’ll work for as little as $3. If we set the minimum wage at $7, it will help the employees and the employers will still employ them, because after all, $7 is less than $10.” Using the anchor analogy from your previous article, minimum wage proponents would say that nobody’s anchor is shorter than $10.
I have some sympathy for that point of view. The US national minimum wage is $5.15 an hour, and I find it hard to believe that more than a handful of jobs are worth less than that. We’re not going to drown anybody by having a minimum wage. On the other hand, I don’t see that it’s the government’s business to dictate wages.
But we are drowning people, we know this (at the very least) because of the exceptions that exist – waiters, handicapped people, teenagers, seniors, etc… often all have laws in various places that exempt or lower the minimum wage for them. If it weren’t for these exemptions, these people would be in trouble!
The “job desperation” angle is only true for a short time period. In other words, I would work a $3 and hour job if I were desperate, but my skills are worth a lot more than $3 but in a very temporary, emergency situation I might work a couple weeks or many even a month at that wage. This is a rational convenience to pay for a quick job in a bad time.
Are there unindustrializeds countries who do not have a minimum wage? In other words, could we observe how it works without one elsewhere?
I meant “industrialized.” The spelling checker got me!
Honestly, I don’t really care about the minimum wage. Basically the only people hurt by it are rich kids who have no skills. Look at the statistics of who works for minimum wage. Poor people don’t get minimum wage jobs, they get jobs that pay well over minimum wage. Unemployed people aren’t unemployed because they can’t find a minimum wage job, they are unemployed because they aren’t willing to TAKE a minimum wage job. Further reducing offered prices wouldn’t get the guy who won’t take a fast food job at $10/hr (the price always posted on In’N'Out near where I live) to take a job at $4/hr.
Minimum wage is a fraud, not because it is damaging, but because it has almost no effect on anyone. Sure, it might have a slightly negative effect on a few people, but since you can ask for change on the street and make more than minimum wage it doesn’t really affect many people.
(Yes, I would suggest all of you readers starving on minimum wage to take up a higher income job like working in fast food or begging in a large city.)
Historically we have seen many jobs lost from minimum wage laws – again, this is not instant.
However, Atanamis is correct in that basically, the law is raised only slightly because even the politicians know it’s a feel good law if it’s done in this manner. However, if the minimum wage is approached as it is in say, Oregon, where it goes up about 4% every year – then this will eventually lead to major problems – first like the one’s I am describing, and then much worse.
That was me ^^^ I’m just using my wife’s computer and forgot to log out.
Admittedly I don’t know much about economic theory, but I have to say the arguments here against the minimum wage sound eerily similar to the justification of some to outsource American jobs offshore. That said, I think there is some truth to the argument about profitability on the employer’s end. On the other hand, the minimum wage today is considerably lower than it was just 25 years ago when adjusted for inflation. That strikes me as unfair.
Sure, businesses deal with inflation just like everyone else, but it seems to have the biggest impact on the poor. I’m not saying, in principle, that its the government’s job to regulate wage rates. However, neither should the government’s currency be fiat money issued by a private corporation.
That said, I think there is some truth to the argument about profitability on the employer’s end.
No Chris, it is profitable to both the employer, the employee and competing employees to have no minimum wage. The employer can save money (as opposed to using unnecessary skilled labor and/or expensive technology), the employee can work (as opposed to being banned from work by a minimum wage) and the competing employees get higher wages (in short, because the scarcity of jobs is less).
On the other hand, the minimum wage today is considerably lower than it was just 25 years ago when adjusted for inflation. That strikes me as unfair.
This is a rare benefit to inflation – and basically a huge reason why Atanamis’ comments are true – the minimum wage has been negated for the most part. Obviously I favor both a return to sound money and no minimum wage.
“This is a rare benefit to inflation – and basically a huge reason why Atanamis’ comments are true – the minimum wage has been negated for the most part. Obviously I favor both a return to sound money and no minimum wage.”
I don’t understand. How is this a benefit? If you’re poor and you work for minimum wage, and your dollar buys less relative to those who worked for minimum wage 25 years ago, I don’t see that as a positive thing.
Again, I obviously know less about this than you. But it seems to me that if I was working at McDonald’s for $5.15 an hour, I would certainly welcome an increase in the minimum wage especially when the value of the dollar depreciates every year. Are you saying that if there was no minimum wage, McDonald’s would pay its employees more money? Really, I’m just trying to understand.
Chris Austere said: “But it seems to me that if I was working at McDonald’s for $5.15 an hour, I would certainly welcome an increase in the minimum wage especially when the value of the dollar depreciates every year. Are you saying that if there was no minimum wage, McDonald’s would pay its employees more money?”
No, the point is nobody is working for minimum wage anymore. The price of labor has risen far higher than $5.15 for most jobs, so the minimum wage is useless, because companies are already willingly paying more than minimum wage.
The benefit Colin speaks of is basically that inflation has caused the minimum wage level to fall far below the market value of labor. So basically, we’re no longer “drowning” anybody with a minimum wage. If minimum wage was raised to, say, $15/hr., the suddenly a whole bunch of people would lose their jobs because the employers can no longer afford to employ them. Eventually, inflation would reduce the value of the dollar, making $15 affordable for employers again, and those people would get their jobs back. That’s the benefit of inflation.
Okay, I see what you’re saying Jew. That makes more sense now. But I’d be interested in seeing some numbers to substantiate what you’re saying. I would imagine that wages would vary widely across the country in fast food jobs, for instance. I know that people in my town are working just barely over the minimum wage in these kinds of jobs, and we’re talking cents not dollars.
I can’t say I’m qualified to answer the question of whether the minimum wage is a good thing or a bad thing, but I do see it as a possible remedy (albeit not a very good one)to the sound money problem. The fact still remains that the lower economic echelon of wage-earners suffer the most from inflation. And I can tell you that the people working the menial jobs in my town are glad about the minimum wage increase to compensate for the cost of living increase.
And I can tell you that the people working the menial jobs in my town are glad about the minimum wage increase to compensate for the cost of living increase.
They are glad for the moment, but only your friends who are worth the increase will be glad in a couple years, because those worth less than minimum wage will be out of a job (well, inflation should keep them employed).
As for reference I encourage you to check out Dr. Walter Block. In my opinion, he’s the foremost expert on minimum wage theory.
here’s a decent debate with him:
http://mises.org/multimedia/block/Block-Blundell-Debate-2007.wmv
Colin, I’ve watched about 60% of the debate so far. Talk about two very different approaches to the issue. I remain unconvinced about either of these two perspectives. However, if I had to pick (and I would hard-pressed to do it at this point) I would go with Blundell – not because he’s right or even very convincing, but because he speaks of a living wage. I think that’s important that people be able to live on what they make.
If I am judging who won the debate (even though I haven’t finished watching) I would pick Block. He seems more logical and uses actual numbers, whereas Blundell comes off as not being mindful (or caring) of the facts. I did cringe, though, after Block’s use of the word “niggardly” – but that’s neither here nor there where the minimum wage is concerned.
And I do think the youth minimum wage, and other exceptions, seems more wise than the blanket minimum wage for all. That would solve the problem of inexperienced workers and their worth. Again, this is a novice speaking.
Chris Austere said: “I think that’s important that people be able to live on what they make.”
I think so too, but I don’t believe the government should be in the business of guaranteeing that citizens earn a living wage. That’s collectivism, and it violates liberty.
I’m all about advocating for the living wage, mainstreaming the idea, rather than leaving it to community ordinances. The debate of how raising the minimum wage effects small business leaves out the human side. Of course, I live in California with it’s enormous cost of living and large immigrant presence–those who end up doing service sector work and making little above the minimum wage. People are demeaned by working for less than what it costs to provide for basic necessities and their families. My position is markets don’t operate fairly on their own.
jenna raby said: “My position is markets don’t operate fairly on their own.”
What do you mean by fairly? Is a fair market one in which every able-bodied worker (regardless of skills or talent) can earn a decent living working 40 hours a week?
“I think so too, but I don’t believe the government should be in the business of guaranteeing that citizens earn a living wage. That’s collectivism, and it violates liberty.”
As a principle, I agree. The question in my mind is whether such measures have become a necessity because of fiat currency. Inflation hurts the little man most, etc. etc.
I’m not sure I follow you. How could a minimum wage negate the effect of inflation? The dollar inflates equally for both employer and worker.
Minimum wage does not negate the effect of inflation. Minimum wage is partly the cause of inflation. Marketers use demographics, obviously. Within these demographics are salary differences. They determine which salary range would be able to afford their product and/or service, and at what price. When the minimum wage is raised demographics are shifted. Marketers notice the increase in salary for a specific demographic, and often respond by ‘slightly’ raising the price of their product and/or service. By the end of the cycle, the raise in minimum wage is voided by the price increases of various products and/or services. The value of the dollar has just decreased.
“I’m not sure I follow you. How could a minimum wage negate the effect of inflation? The dollar inflates equally for both employer and worker.”
Sure, inflation affects everyone. But it doesn’t exactly affect everyone equally. The minimum wage earner is usually barely getting by. So if his measly wages are losing their value in the real world, it makes it harder and harder for him to keep his head above water. Even if he puts money in savings, the interest rate is diminished by the rate of inflation.
Chris, you are correct that the poor are hit harder by inflation.
However the minimum wage does not help poor people. It hurts them. If you aren’t worth more than $7 and the wage goes above it – you get $0. You have no job and are banned from working. The poorest people are banned from work by the minimum wage!
Inflation lowers the real value of the ban. I think you are right that inflation hurts the poor a lot more than minimum wage. But at least the double whammy of both a ban from work and inflation are lessened a little but when they combine.
Maybe you’re right, Colin. I’m certainly not disagreeing with you. I still just don’t feel I have enough knowledge about the subject to form a concrete opinion yet.
http://www.heritage.org/Research/Economy/wm1186.cfm
The minimum wage earner is “usually” a student whose family is making over 2 times the poverty line. If minimum wage were raised to $15/hr (a “livable” wage), high school students and college students would be unable to find part time or summer jobs. If minimum wage were targeted only at “older” people, mothers wanting to work a few hours while her kids were in school would be unable to find jobs. If the regulation were targeted at “only the poor”, there WOULD be excuses found why the 44% of minimum wage employees under the 2x poverty mark would be “unsuitable” for the job. Less than 7% of minimum wage workers have a 4 year degree. You want to help the poor, help them get an education.
At best, minimum wage is a feel good MEANINGLESS issue. At worst, minimum wage hurts kids and the poor, and demonstrates massive economic ignorance. People pay a wage because you can provide value that they cannot get for less. If you provide less value than the standard of living you aspire to, you MUST learn to provide more value or get used to the standard of living you can afford. In America today, even the homeless can find a better standard of living than is average in most of the world. If you want to help them, teach them to produce, give them a chance by providing an address, clean clothes, and a way to get to interviews. If you want to feel good about yourself while doing nothing but damage, raise minimum wage. Minimum wage is a fraudulent concept.
In America today, even the homeless can find a better standard of living than is average in most of the world. If you want to help them, teach them to produce, give them a chance by providing an address, clean clothes, and a way to get to interviews.
Sadie and I have come to realize this and have decided that even if it means living at or below the poverty line, we will focus on raising and nurturing our family. You can still have a more than comfortable life with only one person working a close to minimum wage job.
Atanamis,
That’s certainly food for thought. But I’m always skeptical about numbers, because just the raw statistics can be deceiving. Let’s say the numbers are correct, although it is unclear to me how the Department of Labor arrived at these numbers. Less than 20% of minimum wage earners are at or below the poverty line. The thing that comes to mind for me is, “What about those who make $5.50/hour?” That seems to be the going rate for many of the fast food establishments in my town. I think if we looked at those earning slightly more, even up to $6.00/hour, the demographics might change given the fact that most employers already pay more than the minimum. But maybe you’re right. Maybe this is a feel good issue. There certainly are more young people working for minimum wage than anyone else.
But here the problem I have with the idea that raising the minimum wage will have dire economic consequences: look at the enormous gap between the guy at the top and the guy at the bottom. Never have American CEOs got paid as much as they do today. The get millions and millions of dollars, and rarely keep their positions for more than a few years. This may be an over-generalization, but still. And beyond that, I know of a business which pays considerably less just because they can get away with it. Its got nothing to do with the productivity of the worker. In fact, a similar business just 20 miles away pays its employees about 75% more. But the job market in the town where the first company operates sets such a low standard of wages that they can get people to work for less. I know there are other factors to be taken into consideration, like the comparative profitability of the two businesses, etc. But without me going into all the specifics, I can say that the margin of profitability is not that wide.
I think a good conscice way of describing what a minimum wage does is:
Minimum wage allows *those who have a minimum wage job* to get paid more. However, minimum wage has the downside that total profit in the system decreases (the system being the total income of the employees, and the total profit of employers).
A similar economic effect to inflation would occur if people whos skills are worth less than a certain amount were deported. Strictly speaking, this is probably better for the total economy than a minimum wage (despite the fact that it would be a horribly inhumane policy).
Minimum wage allows *those who have a minimum wage job* to get paid more.
Those who have a minimum wage job are already allowed to make more – there is nothing limiting them. If they can improve whatever skills or education is desirable to employers, then they can make more.