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The Minimum Wage

The good, the bad, and the alternative

 

Yitzchok Hecht

 

            Poverty is a problem that has plagued all societies, leading to various programs intending to somewhat alleviate the burden that the needy must carry. One such program is minimum wage. Scholars have long debated whether the minimum wage should be lowered, raised or even abolished. Clearly, the minimum wage has its advantages and disadvantages. However, there are better alternatives.[1]

 


            One alternative is a welfare substitute. The idea is to abolish the minimum wage and provide money to those affected. This ensures that none of the needy will lose out under the new system, which provides all of the primary advantages of the minimum wage - without most of its costs.

 

            During the Great Depression, President Roosevelt proposed many social reform programs as part of his New Deal. The last major reform was the Fair Labor Standards Act of 1938, which imposed a minimum wage of 40 cents an hour. It is one of many programs designed to prevent the horrible conditions of The Great Depression from recurring by making it illegal to hire anyone for below a specific wage.

 

            The program is certainly effective for those being paid the minimum. It increases the salary of the poor - the ones who need a pay increase the most. It raises their fragile self-esteem by giving them a sense of accomplishment. Also, it offers an incentive to companies to advance their technology in order to replace low wage earners. We all benefit from this.

 

            However, the law of demand dictates that as the price of wages increases, the demand for those receiving those wages decreases. That economic law indicates that the minimum wage increases unemployment. As explained in the Hoover Digest, “the inescapable economic fact of life is that fewer workers will be hired, with the most disadvantaged individuals unable to find employment.”[2] Because companies are forced to pay a higher wage, they move operations overseas, replace workers with machines or decide that the work is simply not so important. The laid off employees will likely be the least skilled and least educated of the low-wage earners. That is why Nobel Prize-winning economist Milton Friedman called the minimum wage “one of the most, if not the most, anti-black laws on the statute books.”[3]

 

The inability to hire cheap labor destroys entire industries which rely on low wage earners. In addition, those businesses that retain minimum wage workers are forced to raise their prices to compensate for their additional costs. We all pay for minimum wage in the form of higher prices. The higher price level affects everybody - including the poor - raising the possibility of the poor not being helped at all.

 

            Apart from the economic damage caused, the minimum wage is illogical. According to Samuelson and Nordhaus, “the minimum wage probably raises the income of some low-wage workers at the expense of others who cannot find work….”[4] Can society tell an unemployed poor person desperate for a job that it is illegal to accept one because it doesn't pay enough? That seems painfully cruel to those the system was supposed to help.

 

            It is also possible that the minimum wage creates a disincentive for low wage earners to enhance their skills or education. For example, consider a person whose market value is four dollars an hour. Due to the minimum wage, he receives six dollars an hour. If that person would increase his skill set so that he is now worth six dollars an hour, he would gain nothing, giving him no incentive to do so. On the other hand, that person may shoot for eight dollars an hour so this is not necessarily true.

 

            When considering the beneficiaries of the minimum wage, it is clear that the minimum wage does not accurately target the poor. There is a clear cost of maintaining a minimum wage and many of the recipients do not need the help. A year 2000 study done by the Employment Policies Institute indicated that the average family salary of those targeted by a proposed minimum wage hike was $42,351 and only 14 percent were the sole earners of families with children[5]. Many of those earning minimum wage are teenagers from families above the poverty line, causing an inefficient and unproductive spreading of wealth. The welfare approach has the ability to target the specific groups that need the money, severely undercutting the wasted costs of minimum wage.

 

            Some may postulate that without the minimum wage, companies would pay whatever they want. But when discussing any form of a capitalist system, that is a fallacy. The market decides wages - not business. A business that offers below the fair equilibrium wage will probably not be able to hire the number of workers it desires. However, it is possible that the market wage for some of these workers will not be enough to survive; society then has a social problem.

 

            Despite appearances, many of those supporting minimum wage are doing so to protect their own interests. Unions heavily support minimum wage because it eliminates those who would otherwise undercut their wages. Noted economist Walter Williams brilliantly points out that certain businesses benefit from the minimum wage – dishwashing machine manufacturers in his example. Because law mandates that human dishwashers get paid a certain wage, restaurant owners have greater financial incentive to buy dishwashing machines due to the inflated price of labor[6] [7]. These special interest groups are the real driving force behind minimum wage legislation.

 

            While it is tempting to theorize about potential solutions, political reality must be considered. Minimum wage has become an icon of compassion. Increases are easily marketed and passed and lowering it is nearly impossible. To suggest abolishing it is political suicide. [8]

 

            In testimony before Congress, Federal Reserve System Chairman Alan Greenspan said, “…the reason I object to the minimum wage is I think it destroys jobs. And I think the evidence on that, in my judgment, is overwhelming.”[9] He was subsequently bombarded with insulting questions by the lawmakers of this country. Cutting any social program is an invitation to demagoguery from its emotional supporters. This was summed up best by New York Congressman Major Owens when he claimed that “the only thing we can do in America that is worse than ethnic cleansing in Yugoslavia is to abolish the minimum wage."[10]

 

            Any proposed alternative must be marketable. Although this is a very difficult achievement, the proposed alternative can be easily portrayed as compassionate to the needs of the indigent. All poor people will continue earning the same amount of money. However, the money would be received from the government rather than the widely distrusted corporations. This can be represented as the government taking responsibility for the poor - that big business doesn’t take advantage of them. Certainly, there are employers who are illegally hiring low wage earners for below the minimum wage and those employees must be taken care of. Replacing minimum wage with a large welfare system is quite achievable politically.

 

            While there are many possible variations to the proposed system, the general concept is to abolish the minimum wage, supplying welfare to compensate those affected by wage cuts. This maintains the entire social benefit of the minimum wage but goes beyond it by creating more jobs. Lowering unemployment produces valuable social effects – including a lower crime rate. Entire industries would be allowed to thrive causing astounding economic growth. The system also maintains a lower price level on many goods. These effects benefit everyone – including the needy.

 

            No system is perfect and this one surely has costs. An essential rule of economics states that “there’s no such thing as a free lunch.” Welfare is expensive and the burden of supporting the needy would be transferred to the taxpayers. However, the minimum wage system is no free lunch either. The government is merely levying the responsibility on industry which passes the cost on to consumers in the form of higher prices.

 

            However, unlike the minimum wage, the proposed system would largely – perhaps entirely – pay for itself. Economic growth caused by new investment and consumption expands the tax base. When the amount of taxable money is increased, the taxes collected also increases even with the tax rate remaining constant. It should be pointed out that while there is probably no way to accurately predict what percentage of the system would be paid for, it would clearly be a significant portion.

 

            It is a moral imperative to help the needy. Politicians have decided that the best way to appear sympathetic is to implement a minimum wage – and minimum wage succeeds in accomplishing the stated goal. But although it appears that the costs of minimum wage are carried by big corporations, everybody pays a heavy price. The welfare alternative reaches the same end that minimum wage does but with a much smaller downside. It is an alternative that is both politically and economically feasible and supplies tremendous gains – economically and socially.


 

 

 

References

 

Cogan, John F., and MaCurdy, Thomas E., The Minimum Wage Was High In the First Place, Hoover Digest Selections No. 2, 1996, http://www-hoover.stanford.edu/publications/selections/962/cogan_macurdy.html.

 

“Ending Minimum Wage Worse Than Ethnic Cleansing?,” 1999, http://www.self-gov.org/good/a0287.html.

 

Friedman, Milton, Free To Choose, University of Chicago Press, Chicago, 1980.

 

McElvaine, Robert S., The Great Depression, Random House, New York, 1993.

 

Samuelson, Paul, and Nordhaus, William, Economics, 20th Ed., McGraw-Hill, New York, 1985.

 

“Sanders Stunned By Fed Chairman Greenspan’s Admission That He Would Abolish The Minimum Wage,” 2001, http://bernie.house.gov/documents/2001/07-18-2001-2.asp.

 

Schraff, Anne E., The Great Depression and The New Deal, Franklin Watts, Sydney, 1990.

 

Williams, Walter, “Minimum Wage, Maximum Folly,” 1999, http://www.jewishworldreview.com/cols/williams060799.asp .

 

Williams, Walter, “Williams On Minimum Wage,” 1977, http://www.policyreview.org/jul97/thbest.html.

 

“Winners and Losers of Federal and State Minimum Wages,” http://www.epionline.org/50states_all.html.



[1] This paper touches on complex economic topics which are beyond its intended scope. Controlled data is difficult to obtain in this instance and is always highly contested. Therefore, the focus will be on the direction that elements should take and not the magnitude. Also, the discussion will center on what should be rather than what is. This is known as normative economics.

[2] Cogan, John F., and MaCurdy, Thomas E., “The Minimum Wage Was High In the First Place, Hoover Digest Selections No. 2, 1996,” http://www-hoover.stanford.edu/publications/selections/962/cogan_macurdy.html.

[3] Friedman, Milton, Free To Choose, University of Chicago Press, Chicago, 1980.

[4] Samuelson, Paul, and Nordhaus, William, Economics, 20th Ed., McGraw-Hill, New York, 1985.

[5] “Winners and Losers of Federal and State Minimum Wages,” http://www.epionline.org/50states_all.html.

[6] It should be noted that due to the “no free lunch” rule, this does not help the economy.

[7] Williams, Walter, “Minimum Wage, Maximum Folly, 1999, http://www.jewishworldreview.com/cols/williams060799.asp.

[8] This is a dangerous problem. Both sides of the minimum wage debate agree that there is a point where the wage is too high. Political attraction can cause the wage to spiral upward to very high levels, which can have catastrophic effects.

[9] “Sanders Stunned By Fed Chairman Greenspan’s Admission That He Would Abolish The Minimum Wage, 2001,” http://bernie.house.gov/documents/2001/07-18-2001-2.asp.

[10] “Ending Minimum Wage Worse Than Ethnic Cleansing?,” 1999, http://www.self-gov.org/good/a0287.html.