Monthly Archives: April 2016

On the Minimum Wage

Lots of news about the minimum wage lately. I’m disappointed at how poorly people understand it – especially people with some knowledge of economics. This leads to the nearly universal view that it is a policy that benefits the poor. I believe this view is incorrect. Here’s why.

I characterize the minimum wage as a form of welfare, or a  policy intended to help the poor. Any such policies should meet 2 basic guidelines.

  1. The benefits should be focused on the poor.
  2. The costs should be paid by the non-poor (middle class or rich).

The minimum wage fails both of these guidelines. I’ll take them in order.

People making the minimum wage are new or inexperienced workers – but not necessarily poor. Many new or inexperienced workers are young people spanning the entire economic spectrum including middle class and wealthy families. High school and college kids working part time jobs during the school year and full time during summers. Minimum wage jobs are frequently taken by middle class or wealthy retired people looking for something to do and a little extra income. Of course there are also some adult head of households working minimum wage jobs to support themselves or their families. Whatever benefits the minimum wage provides are not focused on the poor, but distributed equally to all of these different people, many of whom aren’t poor and don’t need the benefit.

When we think about what kind of businesses have minimum wage jobs, what comes to mind? Fast food, stores like Wal-Mart and Target, etc. And what do these businesses have in common? They are patronized by the lower and middle classes. Rich people are less likely to eat at McDonalds or shop at Wal-Mart. Increasing the minimum wage makes the products and services these businesses provide, more expensive. And the people paying those higher prices are the people who shop there – not the rich, but the lower and middle class.

In short, the minimum wage fails to focus its benefits on the poor, and a significant % of its cost is paid not by the rich, but borne by the poor and middle class. It fails the test of charity.

Yet the problems with the minimum wage don’t stop there. It also fails the test of economics.

Minimum wage doesn’t increase the productivity of labor. All it does is make it illegal to sell one’s own labor below a certain price. People whose productivity of labor is below that price will be unemployed. So each person who benefits from the minimum wage, does so at the expense of others who can’t get jobs at all. Economists argue over how much minimum wage laws raise unemployment – not whether it does.

Minimum wage laws also exacerbate the pernicious effects of discrimination. Suppose you own a fast food restaurant and 2 people apply to flip burgers: one is a black high school dropout, the other is a clean-cut white kid attending college. Who are you going to hire? Remember you have to pay them the same. Normally, a kid attending college doesn’t compete with high school dropouts because his skills enable him to demand a higher rate for his labor. But when minimum wage is high enough, he competes with people having fewer skills and experience. The unemployment rate among young black males is already more than twice as high as the national average. Higher minimum wages will only make that worse, not better.

In this sense, minimum wage laws harm the very people they are supposed to protect –  the newest, least experienced workers, especially minorities and otherwise disadvantaged – by forcing them to compete with more skilled and experienced workers for jobs.

Minimum wage laws passed over broad areas like an entire state have another problem: variable cost of living. The cost of living – and wages – are much higher in San Francisco than in Redding; or in Seattle vs. Spokane. The $15 minimum wage proposed for CA is a bad idea for San Francisco, yet in Redding the effects would be even worse.

Finally, a word about the popular phrase living wage. Many of the people working minimum wage jobs are part-time college students, retirees, and others who have independent means of support and don’t need a  living wage. Yet those who do need a living wage to support themselves or a family, aren’t working minimum wage jobs very long. A minimum wage job is an entry level job. Minimum wage workers quickly gain on-the-job experience and skills and move on to higher paying jobs. Even if the total number of people working minimum wage jobs is growing, they’re not the same people year over year. The group of minimum wage workers has high churn – a constant influx of new low skilled people entering the job market, as others leave the group moving on to higher paying jobs. The minimum wage doesn’t even help heads of households working entry level jobs because:

  • It makes it harder for them to get a job in the first place.
  • They don’t hold minimum wage jobs very long before they move on to higher paying work.

I don’t like to shoot something down unless I offer an alternative. In this case, one alternative is the guaranteed minimum income. This could replace not only the minimum wage, but all forms of poverty and welfare – replace the entire welfare state and all its myriad forms with a single program. Cutting it off abruptly at a certain income level would penalize people receiving this benefit for working. So instead, graduate their income so they always benefit from working. And require able-bodied people receiving this benefit to do whatever work they are capable of doing – sweeping streets, filling potholes, filing paperwork at the local DMV or public school, etc. This is typically work that the govt would perform, whether directly or through contracts, so this would save taxpayers money while taking few jobs from private industry. And it would benefit the people working by teaching them skills that make them employable. And it makes common sense: if you want to receive the guaranteed minimum income, you must be willing to perform some amount of guaranteed minimum work.