This post, as no doubt many of mine will be, was inspired by a discussion on another blog. This particular essay is the result of one on poverty on nolies32fouettes's blog.
The idea that we should raise minimum wage laws is a wide-spread one (mostly among liberals), but it is based entirely on faulty, half-baked reasoning. Some 90% of economists agree that raising minimum wage raises unemployment, hurts business, and in turn hurts the economy. Hopefully this post will help you understand why. I've devoted a lot of time to studying economics and hopefully I can help you understand it now.
First, I want to destroy this fallacy that our standard of living is somehow deteriorating and that poverty is widespread (in America). This couldn't be further from the truth. The REAL per capita GDP has been growing steadily ever since our country was founded (real GDP is the nominal GDP adjusted for inflation). There is no need to push this issue. If our real wages are decreasing, how come almost everyone owns a personal computer, including people under the poverty line (I know one of them personally)? Why do most families own more than one car? Why do a vast majority of households own at least one TV and many of them own more? Why is obesity such a problem (and not just among the “rich”)? Why are all these things true if the average American is supposedly getting poorer? This is nonsense originated by the American left to stir discontent and drum up support for their socialist policies, not a real problem that is being ignored.
That knowledge in itself is enough to disregard the idea that the minimum wage is too low. Now, I know some people DO live in real poverty, but this number is very small, and the solution is not to raise minimum wage. The solution is to let the economy grow, and to do everything we can to help it along, and in the meantime take it upon ourselves to improve the plight of those in need, rather than expecting the government to do it.
What would you say if I told you that minimum wage increases unemployment? Of course you wouldn't believe me. However, what if someone is worth, say, $4.50 an hour to an employer? Because minimum wage is more than $4.50 an hour, that means that this company cannot afford to hire this person and they are therefore out of work! Here's another example. Company X employs 6 people at $6.00 an hour, which, in hour example, is also minimum wage. Congress decides to raise minimum wage to $7.00 an hour. Now company X's payroll is $6 more per hour. In order to bring it back down to its previous level, company X is forced to lay off one of its employees. Now this unemployed person contributes nothing to the GDP, company X's productivity is cut by 1/6 while their business expenses remain the same, and their profit margin shrinks. As a result, they are not able to re-invest in their business like they'd planned, which would have allowed them to hire a 7th employee. Not only that, but the unemployed worker is now drawing welfare and/or unemployment, which is putting additional strain on the national budget and therefore, the taxpayers. But this effect is doubled because not only did company X have to lay off a worker, they were prevented from hiring another. This is just the effect of such a policy (though exaggerated) on one business. Imagine what the effect would be throughout the economy! The result would be to stunt economic growth and prevent an increase in employment.
Someone more familiar with economics would point out that while one employee has been laid off, the remaining five make more are are able to spend it in other industries which would help the respective employment in those industries. But what if the people in those industries already make above minimum wage? Census bureau statistics indicate that the average American already makes twice that of federal minimum wage. The end result of raising the minimum wage would be to reduce not only efficiency, but equity as well!
But believe it or not, the question of minimum wage gets even more complicated. Most people that earn minimum wage or just slightly above it are teenagers. Nobody would argue that fact. So let's say we do raise minimum wage. This will mostly effect teenagers, not working families who need it most! If the minimum wage were dropped altogether and employers started paying slightly less than minimum wage, teenagers (who have little motivation to work compared to a married man with kids) would be discouraged from working, the labor force would shrink, and companies would be forced to pay more in order to fill empty positions. The price of labor, just like the price of any other commodity, would reach an equilibrium price which, by definition, is acceptable both to the buyers (the employers in this case) and the sellers (the employees). Nobody could complain.
However, if the minimum wage were dropped, some other changes would have to take place in order to truly benefit the economy. If unemployment was reduced through removing the minimum wage, the government must duly reduced welfare and unemployment benefits so that we as taxpayers really do experience a lightened burden from the resulting employment. This reduced tax burden would create an incentive for businesses to expand, increasing job opportunities across the board. The cycle would continue indefinitely.
In conclusion, the only REAL way to raise REAL wages (what you can acctually buy with your wages as opposed to the number on your paycheck) is to let market forces operate freely, without obstruction from the government, not to whine and complain and try to artificially force wages higher through minimum wage laws. So many people have been deceived by liberal politicians into thinking that when the number on their paycheck rises that they are more wealthy, when in reality the policies that produced that higher number have also decreased the number of goods that the person can actually buy. There is so much behind that statement that it would take pages for me to describe. Maybe I'll continue on that point later.
One last thing to remember: no matter what congress sets minimum wage at, there really is no such thing as minimum wage. Minimum wage is always 0, since you don't have to work if you don't like the wages.
Nice post. Economics has always been a weak point for me--like anything involving numbers, come to think of it. :) But you explained the issue very clearly. I'm half convinced, even though, like most common misconceptions, it's a little hard to let go of. People would rather believe that a minimum wage saves them from poverty because it's something they can depend on, and "market forces" is just too big of an abstract concept for them to handle.
Precisely. And that's the whole problem with economics: it's concepts are often too abstract for the average person to accept against the reality of their situation. They can understand how raising the minimum wage increases their income, but not how "stimulating corporate investment" will lead to better job opportunities in the long run. To complicate things even further, the minimum wage issue is a sitting duck for any politician who wants to exploit it. This is usually democrats, but more and more republicans too are catering to the perceived majority, and "lazy" economics.
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Build a man a fire, he'll be warm for an evening.
Light a man on fire, he'll be warm for the rest of his life.
The problem is, "stimulating corporate investment" most directly increases the money in the hands of corporations. This heightens the disparity between the rich and the poor, but more importantly, it grants more power over the economy to institutions that already have far too much power and too little public oversight.
SnoopyDaniels, thanks a great deal for this excellent analysis on the wage myth. I hope more people read this. Also, you mention how higher minimum wages discourage corporate reinvestment, and why this is harmful. I was considering an article on this. Of course, it would be simple, it's a simple concept. But I'm not sure if I will write it. I need to do other stuff...
Finally, I'm strangely confused by your excellent grasp and articulation of the economics here, and your theolatry. I thought that both required a fine reasoning facility. hmm, a fly in the ointment.
Michael Allen Yarbrough
You've made me a very happy young lady.
Now go comment on one of hexhunterkid's blogs. I'm way outnumbered over there. : )
Wait a minute.. The masses are ill-informed, yet the political powers make vague references to how their 'resources indicate' ... BRILLIANT! Sugar never tasted soo sweet.. at lest, that's what MY sources indecate! hehe :D
Ashes to ashes dust to dust, all shall return to the captian crunch.
You rock! I hadn't thought of the abolishment of minimum wage idea as a benefit to society before. For me it had always been an issue of love for the free market. Now, I can love the free market and my fellow man! Great post.
--Mike
Yeah Right! Eliminate minimum wage that way we can all work for 23 cents an hr. where do all you lops come from
Money is all relative. Just because it's possible to hire someone at 23 cents an hour doesn't mean companies will be able to. It's part of the principles of economics. Hooray, Adam Smith!
--Mike
Yes, there are such things as stupid questions, whatever people say, and that was one of them.
Let me ask a question, and maybe it will answer yours. Would you work for 23 cents an hour? The obvious answer is no. Therefore, if businesses want people to work for them they will HAVE to pay more.
Then of course there is the fear that businesses everywhere will collaborate to lower wages. However, when nobody is able to afford the goods these businesses produce they will either pay their employees moree or deflate their prices to compensate for the lack of incomes. In the end, real incomes will remain unchanged and the theory of monetary neutrality will be proven once again.
Let me ask another question. We don't have minimum prices for most goods. What's to prevent us as consumers from taking advantage of these poor businesses and pay them little or nothing for their products? Duh. The businesses won't sell their goods for little or nothing and before long they won't produce the goods at all. It's called supply and demand, and it works for labor just as well as any other good.
But the bottom line is, if you still have that question after reading my essay, you're an idiot.
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Build a man a fire, he'll be warm for an evening.
Light a man on fire, he'll be warm for the rest of his life.
Businesses can hold out in that game far longer than workers. People will go hungry while we're waiting for them to "pay their employees more or deflate their prices". Even if they are in the end forced to do that, it will only be enough to sell what they produce - keeping the workers on the edge of financial doom.
Here's a book I believe everyone should read: The Grapes of Wrath, by John Steinbeck.
Minimum wage isn't even enough to live on. If it's true that the majority of Americans are living in luxury, then raising minimum wage shouldn't really have much of an impact, except to help those few who are being paid starvation wages.
Raising minimum wage is a sure way to raise the cost of living. In sodoing, those out of work will have to save up even more to get a meal. Collection cups can only get so big.
--Mike
If minimum wage were high enough that those on it wouldn't have to receive welfare, we could afford to pay for more unemployment support.
But if, as you argue, most corporations don't exploit their workers anyway, then it shouldn't cause them to raise prices if we simply enforce a higher minimum wage.
Importantly, if corporations are aware of the market forces as you claim, and minimum wage were attached to the cost of living, then corporations wouldn't raise prices in response to a minimum wage increase, for fear of causing another minimum wage increase.
No, you're missing the point. When you raise minimum wage, all that changes is the relative poverty of those who have nothing. It doesn't matter whether minimum wage is 5.15 or 7.25; in the end, it will be worth the same (that's called inflation).
--Mike
If minimum wage were raised to that point, corporations would have to raise their prices to make up from the higher cost of labor.
And what exactly does the exploitation of workers have to do with what corporations charge for their products? If you've made even a cursory study of publicly traded stocks you would find that the average profit margin of most corporations isn't even that high, and the profits they do make will eventually be used to expand the business and hire more people. You're basing your opinion on the myths spread by the Democratic party that all corporations are automatically trying to take advantage of their employees.
What everyone needs to understand here is that prosperity is ONLY determined by national production. Just think of the absurdity of thinking that changing the minimum wage can alter the quality of life. If we can determine our level of prosperity by simply mandating that everyone is paid a generous sum of money, then why don't we make the minimum wage as high as we please? The answer is that minimum wage laws don't really change the level of prosperity, only the distribution of it. Surely that's easy to recognize. You can say that it will take money out of the pockets of the rich and into the pockets of those who really need it, but in the end, that's not true.
Since corporations have to raise prices because of higher labor costs, or suffer reduced profits (and therefore, reduced future growth which would have created more and/or better jobs) you will end up with the same amount of prosperity, if you're lucky. If you are unlucky you are actually damaging overall prosperity for everyone by reducing employment, and therefore production, and since our prosperity is determined by how much we produce we will all end up poorer.
Does it get any simpler than that?
Let me make it clear that in suggesting that we eliminate minimum wage I am not suggesting that we instantly remove it. It needs to be gradually phased out. This should be acceptible to all those involved since it would prevent any permanent damage from being done if the policy should prove faulty, an adequate safeguard for the faithless.
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Build a man a fire, he'll be warm for an evening.
Light a man on fire, he'll be warm for the rest of his life.
You've all neglected to comment on SnoopyDaniel's mention of how people around and below the poverty line all have a computer, television, etc etc etc. Well, keep in mind the fall of several banks recently, such as Wachovia, a NC/SC-based bank. They gave out loans to people without prior credit checks. Now places like Wachovia had to be bought out or face closures.
So yes, we are still in an economic crisis. People only have things because they owe the government money. And those who don't are living that actual POOR status that SnoopyDaniel mentioned. And those who are homeless (which is up to 6% in the town I live in) are those who got screwed by our economy.
I'd like to place for us a personal example. Both my parents got laid off from teaching in the same school district. At the same time, we had a variable-interest mortgage on our house. This means that when we got the loan, we had a very attractive percentage, with reassurances that typically the interest rate goes down, not up. But precisely when my parents had gotten laid off, our interest rate on the mortgage was up to 11%, which was approximately $1200 per month. My parents both got jobs right away, but had to move, which costs money, pay rent on a new apartment, and deal with crazy gas prices, where my dad even STILL has to commute 30 miles one-way. Meanwhile, my sister and I both don't have jobs while we're in college, and have to ask for money for necessities that my parents don't have. My sister and I live on a meal plan, but occasionally we DO need toiletries, new clothes, etc. Need I mention that my dad's FULL paycheck goes to the mortgage and rent alone (teachers get paid about even with the working-class, but have upper-middle-class respect). And right now the only way to get rid of the house that we're paying a mortgage on is to let it foreclose on us, which has other latent effects.
I think we have to eliminate the stigma of homeless people. Think of those who can't get another job as quickly as my parents did, having to pay $1200 per month on a mortgage, plus food, plus utilities, plus whatever else they owed. My parents, still, for example, owe their student loans, which they've been paying for 20 years; my mother has a disability that requires hospital visits that don't get covered by our health insurance. We owe Duke Hospital hundreds of thousands of dollars. Our ONE family car isn't paid off either.
While SnoopyDaniel offers some very valid points, I daresay it's not the whole picture.