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.