Why The Minimum Wage Is Not The Safety Net You’ve Been Told
Although this is firmly an argument of economic theory, the minimum wage is often spoken of in terms of morality. The rational reaction to a person that states – “I am against the minimum wage because it means I can pay my workers less and improve my bottom line” – is typically one of disdain. Disdain against the morally corrupt capitalist who values nothing above money and cares not of his employees as they are simply vacuums for potential profit.
Yes. Dramatic, I know. This is certainly a dialled up example of a response, but hopefully, you have understood it for the meaning intended. The moral argument against the minimum wage lies in the falsehood that the only purpose this policy serves is making poorer people poorer so richer people can get richer.
That is an argument of ignorance, and as I will propose – could not be further from the truth.
What Kind Of Jobs Do The Minimum Wage Effect?
The answer is low skilled jobs. Setting a hypothetical minimum wage of $15 would mean an absolute value of 0 to anybody whose labour is already being compensated at $15 or more – and so, a small but certainly not insignificant percentage of an average Western economy.
I recognise externalities of the imposition of a minimum wage would affect an income earner above $15, but for the sake of this argument I will omit that for now.
And Who Are The People Working Low Skilled Jobs?
- Young people trying to enter the workforce.
- People who didn’t manage to receive any form of tertiary education with little working history.
- People transitioning from a redundant field with which they did not learn any transferable skills.
- Immigrant or minority populations who may either lack necessary communication skills (language) or are victim the hard task of social integration and bigotry.
- People who suffer from a disability.
- People with poor social skills and poor working history.
The Employer’s Dilemma
The employer is the first victim of a minimum wage. For this example we shall say the employer is of a box factory.
His best box maker’s productivity is worth $20 an hour and his worst box makers is $10 and each employee is payed exactly what they produce.
A minimum wage set at $15 means he can no longer pay his least productive box maker $10 – for it would be illegal, despite the fact that this person cannot produce at a value higher than $10 an hour.
What can the employer do?
If he wants to continue producing at a combined level of $30 an hour with his two employees and not pay his staff more than what he would make – he must now pay both his best and worst box maker the same amount – $15.
The best box maker is unhappy and shortly after leaves to another employer who will pay him what his productivity is worth.
Now our employer is down his best man and overpaying his worst. After the minimum wage he is no better position. However, despite the hassle of finding a new job both of his employees are better off – for now.
The box maker and his company go out of business because his costs are higher than his income and now that person who was producing at $10 before is now producing at $0 because he is out of a job. And to make matters worse, he is going to find it really tough to get another job because the minimum wage has priced his productivity out of the market.
So any ambition he might have had to learn and develop on his way to becoming a $20 an hour man is now taken away from him and he is now unemployed.
The movement from S=D up the curve to the left to A explains in simpler terms what I was saying above and can be surmised in even simpler terms here.
The labor market is thrown into disequilibrium. Some unemployed workers would gladly work for a lower wage but cannot find a job, and some employers would be happy to hire workers at a lower wage but the law forbids it.
The Morale Argument
So there it is – the economic argument against minimum wage. But that is not sufficient enough or convincing. We need story and narrative, what about the mother of four who needs to work three jobs because noone pays her enough? Surely we should set a minimum wage for her! So she can have peace of mind and financial security.
This is the morale argument for a minimum wage. Surely we should paying a mother of four enough so she doesn’t need to run between three menial jobs. Surely!
The unfortunate reality of any rule and of any policy – no matter how Utopian, fair and just – is that there will always be outliers. There will always be some people that don’t quite make the cut. It is a sad reality to face.
In these instances we rely on a bevy of government and social services to step in and carry the burden, and according to the welfare allocation in both my country (Australia) and the world’s economic indicator (USA) in their 2018 budgets the welfare allocation is a hefty and majority expense. One would hope this is providing the insurance policy we need for an example like the mother of four.
Addressing Additional Pitfalls For The Minimum Wage
- When labour becomes more expensive then an automised alternative, that job will disappear. Of this you can be assured. Mass automation is coming no matter what we do but artificially increasing the price of labour is a sure way to get there fast!
- Access to cheaper labour is a key determining factor for investment. Why do you think the worlds manufacturing is done in Asia?
- If the price of labour increases, then that will reflect in the price of goods. Ultimately raising both your income and your outcome, leaving you with the same purchasing power as before – it’s one big circle jerk!
- Ironically a minimum wage prices out the lowest skilled – and most in need of work – people within an economy. If someone is willing to work for $2 an hour, let them work.
- Can you truly enforce a minimum wage across the board? Some sectors will just revert to underground economy and pay cash for labour. Therefore distorting a local industry and economy.
- It does not matter what you feel you are worth $ – you must address the market conditions and then make the decision whether you are willing to accept this amount or not. Life is a series of cost/benefit decisions. Early on in your work career you must swallow your pride, sacrifice your time. And work.
- A minimum wage will prevent the youth from entering the market and going through a rite of passage that defines a person. The youth are the least skilled, least employable of the lot.
“And the moral argument is turned on its head. It seems the moral thing to do in favour of those unskilled workers is to allow them a chance by doing the exact opposite of their initial proposition. By not enforcing a minimum wage”
Finally – I have heard of this notion that in the USA an American won’t work for a certain income or work a certain job because its ‘beneath’ him or some tripe like this. I have been told by Americans themselves – without any sense of shame or sour – on numerous occasions that your middle – upper class American won’t take on fast food jobs, cleaning, or Walmart, these jobs are left for the poor.
If that is your argument for a minimum wage then you have a cultural problem, so don’t yell and smash the economics for trying to solve it. I know that for me in Australia you are only really going to be earning a minimum wage if you are young and working an absolute entry level job or highly unskilled adult. In both cases, this is the entry to big bad, competitive world of jobs. If you cannot get work anywhere except in entry level, perhaps you are not qualified, or presenting yourself well enough to gain employment above the minimum wage. I understand the argument for immigrants, and handicapped, and so forth. If government programs that train you for work, or support you while you find work do not do the job, then perhaps a woefully inefficient government is to blame.
My Personal Brush With The Minimum Wage
I have worked since I was 15. Cinema, pizza delivery, golf caddy, labourer, odd jobs a plenty. When I turned 18 I continued to work ‘unskilled jobs’ until I was about 21. Bars, cafes, restaurants, poker tournament director and so forth. I tried doing my very best at all these places, but was always earning the minimum wage or just above it.
Although I thought I was worth more, I couldn’t convince any employer of the fact. This is the reality of the job market. There are philosophical rabbit holes to go down addressing whether this is truly the way we want our society setup. But the reality is, that our society is set up this way. And to not admit that truth, and to consume energy arguing against it is doing yourself a misdeed.
We must make best with what we have and with what opportunities present themselves.
You are the only person who will make that difference. I work now for a company who pays the minimum wage – as a base salary. There is big earning potential however it is merit based and therefore there are big disparities between me and another person who has the exact same job. Although I am happy to earn that minimum wage, I know that the company is not happy to pay it. This is a compulsory fee they pay me despite the fact that I would work there even without it!
Another factor the moral argument omits is the plethora of reasons why people work. It is not all a matter of hours and dollars.
On similar economic lines, check out my article on the Wealth Tax as well!