The Advantage Of The Minimum Wage

There is a lot of debate over the minimum wage. An internet search of the topic will return with almost unanimous condemnation of it. It is blamed for unreasonably pushing wages too high and causing unemployment. It is decried as a major cause of economic problems rather than the solution. However, these arguments are based upon over simplified ideas and graphs. Now, most of them look nice and are easy to understand, but they should be judged on how well they describe the real world. The simple fact is they don’t really.

The main argument is that if a workers marginal productivity is 5 euro, they cannot be paid 6 euro. Now this presumes that the boss knows what the workers marginal productivity is. If they worked individually in a factory, this is possible, but for most other workers it isn’t. For example if you go to the student bar and order a pint, what is the bartender’s productivity? Would measure the number of pints he pours? But you only need one bartender to do that, the others just reduce the time you’re waiting. What about the bouncers? Or the guy who cleans the toilets? If you stop and think of a job, the fact is it’s probably pretty hard to measure its marginal productivity. And low wage jobs are some the hardest to measure. So a workers wage is not based on an immovable and perfect law of economics, it really is just a guess.

Another assumption is that workers are never under paid. The logic is that if a worker was under paid, a rival firm would offer a higher wage to them. This might be true for say, a manager, but not for someone doing a menial job. Can anyone honestly tell me that a rival company will tell someone working in McDonalds, I like the way you mop the floor or I like the way you work the deep fat fryer, come work for me. It simply doesn’t happen. There are no head-hunters scouting for low wage workers.

So it’s quite possible, in fact pretty likely, that workers can get under paid. But it could be argued that if wages are too low, people just won’t take a job. But if you have the rent to pay, you’re going to get a job no matter what the pay is. But some would say why don’t they ask the boss for a rise or form a union. But take a look at who low wage workers are. Teenagers, immigrants and women. If I asked you to give me a list of the people least likely to confront their boss, least likely cause any trouble that would be it. This is why the government must force the firms to comply. The government has to stand up for those who can’t do it themselves. Another reason is that even if the boss was kind enough to give them a raise, if no other company did it, he would be uncompetitive and go out of business. That is why the government must force all businesses to comply.

In fact the strongest argument in against the traditional view of the minimum wage is that it doesn’t hold true in real life. There is the famous Krueger and Card study that concluded that “We find no indication that the rise in the minimum wage reduced Employment.”Most recent studies find that it has only a slight effect on employment. It either slightly increases or slightly decreases employment. Either way it does not result in the mass unemployment predicted in the traditional argument. Look at this review of recent studies. It concludes that there probably are unemployment effects, but it is extremely slight. We can increase the minimum wage and boost the income of the lowest wage workers with only slight effects on employment. In order words the benefits far outweigh the negatives. A theory must stand on how it reflects real life. If it is unrealistic it must be ditched. The traditional theory of the minimum wage is unrealistic.

The minimum wage has many benefits. It reduces inequality by redistributing income from business towards low wage workers. It provides a boost to the economy as low wage workers spend almost all of the money rather than saving it as richer people do. It also reduces poverty and directly helps the poorest workers. By increasing workers wages it improves their morale and therefore productivity as well as reducing turnover (a major expense in low wage industries like food & drink). Wages are not the be all and end all. Often they are not even the main expense (as in capital intensive industries) or most important (as in inelastic industries).

I would like to finish on one final note. America has this thing called food stamps, which basically means that if you cannot afford food, the government will give you money to buy it. Many of the people on food stamps have a job. It is a terrible injustice. There should be a simple rule in life that if you are willing to get a job and work hard, you should be able to feed yourself. That is why I believe that the government should guarantee everyone who has a job gets a living wage and is not mired in poverty.

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5 Comments

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5 responses to “The Advantage Of The Minimum Wage

  1. When I was reporting on business years ago for my local newspaper, one of my fellow reporters interviewed a Burger King franchisee who said he was going to have to close one of his restaurants because of a shortage of workers. He said he’d tried everything to attract workers, but nothing worked. My fellow reporter asked him if he had thought of offering higher pay. He said this was impossible. It would mean raising the price of a hamburger a few cents, and he would lose business to his competitors. With a reasonable minimum wage, all the fast-food restaurants in town would be on a level playing field, and this would not be an issue.

  2. First off, I would argue, at least in America, that most people support minimum wage. Those who oppose minimum wages are the pariahs.

    Very few people actually work for minimum wage in America. Last time I checked it was under 2%. The reason for that is it’s a stepping stone job. You made the funny reference to head hunters trying to poach M’cDonalds mopers or fry guy’s. While funny, and true I might add, no one believes that people are in search of low skilled workers. The fact of the matter is the guy mopping the floor or working the deep fryer won’t be in that job for long. In a lot of cases these people will leave for another higher paying job or get promoted from within.

    Most minimum wage earners are young kids, straight out of high school looking to gain some experience, not earn a living. They can gain experience, even at mcdonalds, that will lead to a better job. At the least, the kid who worked at mcdonalds for 7 months shows to his next employer that he or she is responsible, gets up every day and goes to work. That proven work ethic will go miles in an interview.

    The Krueger/Card study is a good one to point to to try to prove your point. I won’t dispute their study because the fact of the matter is, you still need to fill the jobs. Raising minimum wage won’t effect unemployment because generally the business had a position that needed filled. What it does effect, I can attest to this, is the under educated and under skilled worker.

    I’m a small business owner who employs 29 people. Most of my workers are skilled laborers and started well above minimum wage but I do have a few low skill positions. Minimum wage is already too high for the work that these positions involve. Under no circumstances, while filling these low skilled positions, would I hire someone with no work experience. Period, end of story. If I see a resume of someone with no job history, gone. I have to fill these jobs often because like I mentioned before, the turnover rate is high because it’s a minimum wage job. People find better, higher paying jobs and leave regularly. That’s the unintended consequences minimum wage. It discriminates against the most vulnerable people in society. The under-educated or the under-skilled. I would hire a no skill, no experience worker for under minimum wage. He or she would get job experience and move on. Right now these no skill workers are priced out of the market. They don’t get hired at all. If minimum wage is $10 dollars an hour, why would you hire someone with no work experience?

    People have a hard time seeing unintended consequences because it’s not right in their face. They see, like you said in your blog, more money in workers pockets, they’re out spending, the circular flow of money nonsense that keynesians love to tout. It never crosses most peoples minds how this effects the low skilled workers or the cost of the product.

    Some may think it would be nice to just mandate that businesses pay a higher minimum wage and the owner will just say “Oh well, that’s the breaks, I guess I’ll just eat the cost” In reality that never happens. People who think like this see the world how they think it should be and not how it really is. Actually the additional cost does get pushed into the product. That means consumers pay more, less money in their pockets to consume other things, there’s that silly circular flow again.

    Lastly, you said “It provides a boost to the economy as low wage workers spend almost all of the money rather than saving it as richer people do.”You say “saving it” like rich people put it under the mattress or bury it in coffee cans out in the backyard or something. Most rich people are interested in making more money, you know greedy capitalist, they generally re-invest it, therefore giving more capital to another business to expand with and hire more people. Even if they just parked it in a standard savings account it would be beneficial because the bank reserves would be higher, allowing the bank to lend more money to people who wish to start a business, or to people who just want to spend it back into the economy.

  3. Pingback: A New Economic Theory | Robert Nielsen

  4. Pingback: Minimum wage and crime rates not linked - Market Business News

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