The Progressive movement is often thought of as having made fantastic improvements to our standard of living in the US during the 20th century. This claim is completely false, as is evident from its application to the federal minimum wage law. The minimum wage has been hailed as a great triumph for the poor and a sign of how civilized our society has become. Increases to the federal minimum wage are often passed by comfortable margins and there are no congressmen or senators who have openly opposed the minimum wage or argued for its abolition in recent memory; to do so would be political suicide. The minimum wage is often seen as one of the great safety nets for the poor working class in this country. Unfortunately, the truth is much different.
The minimum wage law does not need to be changed, it is not set too high, it does not need more exceptions, it simply needs to be abolished. Most believe that this argument is made on behalf of the capitalists and wealthy business owners. In fact, the opposite is true. The minimum wage should be abolished if we are to show true compassion to the poor. The minimum wage hurts exactly the group of people that it is supposed to protect.
Even at first glance, the arguments supporting the minimum wage are specious. Many argue that the minimum wage will help the poor by setting a floor on wages and raising those on the bottom of the income scale to a more acceptable level. The analogy used is that setting or raising the minimum wage will raise the tide of wealth and lift the poorest members of society up with it. A more accurate analogy would be that the tide will indeed rise but the poor will be left to drown beneath it.
The most obvious objection to the concept of the minimum wage as able to raise the wealth of the least well off in society is, if this is really how it works, why stop at such a low level? Indeed some left liberals contend that the minimum wage doesn’t go far enough and in some cities still leaves those who earn in it in poverty. They advocate for a so called “living wage,” which is a minimum wage that is indexed to the minimum amount necessary to “survive” in a specific locale. The concept of a “living wage” carries with it its own logical absurdities but I will limit my objections to those which also apply to the general minimum wage for brevity’s sake.
The current federal minimum wage is only $7.25, with some states having it slightly higher than this. But if the minimum wage really has the ability to raise the wages of those on the bottom of the socioeconomic scale, then why should we only give them $7.25? Why shouldn’t we push their wages up to eight dollars an hour, or ten dollars and hour, or one hundred dollars an hour? By that reasoning, such a method could ensure that everyone is rich. The answer to why no one is advocating a one hundred dollar minimum wage lies in the core concept of how wages are determined and betrays the fact that wages are prices which are set by supply and demand just like any other. They cannot be manipulated by government without causing severe market distortions.
If a private company is deciding whether to hire an additional worker, it will consider two factors: how much additional revenue will be raised by the additional worker and how much the additional worker will cost, namely his wage. The amount of revenue that the worker adds to the firm is known as that worker’s “marginal revenue product” or how much additional revenue that worker produces. So if a company is receiving $1000 an hour in total revenue before hiring Joe and then after hiring Joe the company receives $1007 an hour then Joe’s marginal revenue product is equal to seven dollars an hour.
Over time, Joe’s wage will tend to move toward the value of his marginal revenue product, that is, he can expect to be compensated nearly as much money as he earns for the company. Let’s assume an MRP of seven dollars for Joe, and let’s say that he is hired at the wage of five dollars an hour. This means that the company that hires Joe is making two dollars of profit on Joe’s labor every hour that he works. This is a situation that can not last in the long term in a free market system because the forces of competition. Competition from Joe’s employer’s competitors will tend to raise Joe’s wages. Joe’s wages will move up until they reach seven dollars per hour because a competing firm would be willing to pay Joe the wage of six dollars per hour and thus bid him away from his current employer, while still making a profit of one dollar per hour. Although it is only a single dollar increase per hour, in the long run Joe will make several thousand more dollars over a year’s time. Then either his original employer or still another employer could offer him the wage of $6.50, and so on and so forth until his wage reaches his level of productivity or seven dollars per hour. At any wage level between five and seven dollars, another employer will have a profit incentive to offer Joe a higher wage because in that wage range he is producing more than he costs the company in wages. The threat of losing Joe to competitors will force Joe’s employer to raise his wages over time to keep him there.
Now suppose that some traditional advocates of the poor come in and decide that Joe is being exploited at the wage of five dollars an hour and decide to provide him with a just amount of remuneration: ten dollars an hour. It is argued that this will help Joe and other workers like him by giving him enough money to survive on. So will Joe now be twice as rich? Unfortunately not; that isn’t how it works.
If Joe is already working at five dollars an hour and a minimum wage of ten dollars is imposed, the company that hires him will lose money. This is because Joe’s Marginal Revenue Product is only seven dollars an hour, this means that the most revenue that Joe can earn for the company is seven dollars an hour. If he earns the company seven dollars an hour but the company is forced by law to pay him ten dollars an hour, the company would lose three dollars each hour that Joe works. For this reason the company is forced to either fire Joe or face bankruptcy.
In this way, instead of raising the wages of those at the bottom of the income scale, the minimum wage law takes jobs away from the poor and forces them further into poverty. The effect of this law has been no less than devastating to the members of society that it was devised to help. Rather than helping them it takes their only method of advancing their economic position away from them. There is a reason that lower skilled workers have much higher unemployment rates than highly skilled workers: they cannot work at the right price.
In May 2011 the unemployment rate for individuals with a bachelor’s degree or higher was 4.5%, the unemployment rate for people with a high school degree was 9.5%, and the unemployment rate for individuals with no high school degree was 14.7%. This should not be. Although it would make economic sense for less educated people to be paid less because they can perform fewer skills, it does not follow that they should have a higher rate of unemployment. The fact that they have fewer skills does not change the fact that even poorly educated people can perform many functions including manual labor and some clerical work.The problem is that jobs have shifted in the direction of more skilled labor because it is no longer profitable to employ low skilled laborers at the higher prices imposed by the minimum wage.
Without going into too much detail-because this subject could easily be the topic of its own piece-the minimum wage has had detrimental effects on the African American community. On average, African Americans tend to be less educated than whites, that is, a lower percentage of the population holds higher education degrees.1 The reasons for this are many, and the trend has been declining over time, but it remains a fact and this fact translates into many African Americans-on average-having lower Marginal Revenue Product than the general population as MRP is positively correlated to education. This leads to the problematic effects of minimum wage legislation harming this community disproportionately. This point is strengthened by the fact that the black unemployment rate, which in the late 1800s and early 1900s was roughly the same as the white unemployment rate, is now double the white unemployment rate and has been since the introduction of minimum wages in the 1930s.2
Objections to the minimum wage are based on a deep misunderstanding of labor markets and fail to account for empirical observations of current wage levels among members of the workforce. The most popular argument states that if the minimum wage were removed, employers would take advantage of employees by paying them a few dollars and then exploiting them to the greatest extent possible. Thus, without the minimum wage we would be thrust back into the early days of the industrial revolution, when employees worked long hours for less than a dollar an hour. Such an argument implies that employers will exploit their workers by paying them less than they are worth.
If the assumption were true that without laws, employers would pay their employees even less than they are worth, why don’t employers today pay all of their employees as little as they legally can? If employers acted as advocates of the minimum wage assume they should, then they would all currently pay their employees the minimum wage. This fails every empirical test. Lawyers, doctors, construction workers, manufacturing plant workers, even many people that work in retail today all earn more than the minimum wage. This would not be possible if employers acted in the way that they are imagined to by supporters of the minimum wage.
The reason that employers don’t act in this way is because of the competitive effect that was described previously. If the minimum wage law were removed tomorrow, the only people who would be paid less than the current minimum wage are those who produce less than $7.25 per hour. Any other workers who produce more would be still be paid an amount equal or nearly equal to their MRP. If an employer tried to pay his workers less than they produced they would either be offered a job by another employer or the worker would seek employment at another firm. The profit incentive of both prospective employers and the employee ensure that this will happen.
Another objection to the claim that we should abolish the minimum wage is that paying workers less than a certain level of subsistence is immoral because it will leave them in poverty. What is worse, a job that pays three or four dollars an hour or no job at all? Can we really claim to advocate for the poor as their guardians by preventing them from accepting a job at a lower wage than society deems is necessary? No one would force the poor to accept low wage jobs, but we should allow them to make their own choices. If it is true that no job at all is better than one that pays three or four dollars an hour then let the poor make that decision for themselves.
This advocacy for preventing workers from accepting low wages is based on economic illiteracy at best and special interest concerns at worst. The poor are currently in dire straights; the depression of 2008 has hit them especially hard and they are still feeling its effects four years later. It is immoral to prevent people who want to work from voluntarily making arrangements to do so. Preventing the poor and starving from working for any reason should be seen for the morally reprehensible policy that it is. We need to repeal minimum wage laws so that the poor can find jobs in order to better their situation without having to rely on the charitable or tax induced contributions of others. If we repealed the minimum wage laws, less-educated people could regain their ability to compete in the work force by out-competing skilled laborers on price of labor. African Americans would see their unemployment rate plummet and establish parity with Caucasian and national employment rates which would make great strides to end racial disparities in wealth. Repealing the minimum wage is one of the most effective and expedient anti-poverty measures that could be enacted in our country today and it is one that is long overdue.
1The 2010 census numbers for bachelor’s degrees can be found at the census bureau’s website http://www.census.gov/compendia/statab/cats/education.html
2A brilliant discussion of the racial disparities of the impact of minimum wage laws by economist Walter Williams can be found here http://townhall.com/columnists/walterewilliams/2011/05/11/minimum_wages_discriminatory_effects