On the Minimum Wage

I’m not an economist. However, I love economics, which is perhaps why my sister, who asked me a question about minimum wage, suggested I start this blog.

She had read this very good article on fee.com, which presented the idea that minimum wage was a way for eugenics proponents of the last century to eradicate “undesirables” using public policy.

My sister asked me how minimum wage could possibly harm the poorest of a population. While I had never before heard the claim about eugenics (read the article and come to your own conclusions), I am familiar with minimum wage.

Here is the response I gave her, edited a bit for clarity, conciseness and continuity:

When people conclude that the minimum wage will help the poor, it is at first glance, a reasonable conclusion. If the poor make more money, then perhaps, hopefully, they will have enough to provide for their needs (perhaps I’ll discuss what needs are in another post). If, for example, the minimum gross income needed is 16 dollars an hour at 40 hours a week, and that is what the minimum wage rate is, then things are great, right?

Think about what would happen if there were no minimum wage at all, which before the Fair Labor Standards Act of 1938, there wasn’t.

Employers could hire people for less than what they do now.

An extremely unskilled person, or someone who seems in today’s world to be unemployable or “undesirable”, could potentially get hired for… a dollar an hour lets say. If the would-be employee voluntarily accepts the job and the business owner is fine with paying a dollar an hour, who’s to say it’s not a fair exchange for the value the worker contributes?

However, if the government makes the minimum wage four dollars an hour, despite the fact that the market said that some employees really only did work that was worth a dollar an hour, then employers have to make a decision. They’re now required to pay 400% the wage they used to pay those people. Is it worth it to them to pay that much when they really only bring in value that’s worth a dollar an hour in exchange?

Depending on the job, the profit margin the business has, and other factors, perhaps the business owner can say “ok, I was paying them a dollar an hour and they were making me 9 dollars an hour. Now, if I pay them four dollars an hour, I’ll still make 6 dollars an hour…still worth it.”

However, are they going to keep that specific employee? Are they going to hire similar employees going forward? If they have to pay a wage that’s 400% what it used to be, savvy business owners are going to be more picky about who they choose to hire. They will need the extra expense to be worth it. If the original cost was one dollar, and the profit was 9, imagine when the minimum wage gets up to 10 dollars an hour. If employers aren’t proportionately picky about who they hire as the minimum wage increases, they will reach a point where continuing operation will be financially impossible. Unless they have employees that are so much better that they’re able to bring in more than the “one-dollar-an-hour and four-dollar-an-hour” ones were, the employer won’t make any money (since in our example it was (1 dollar out in wages for 9 in in profit, or 4 dollars out in wages for 6 dollars in in profit). If they have to pay 10 dollars out in wages, the employee who was profitable when he made 9 dollars an hour for the employer is no longer profitable. He is no longer fiscally a possible person to hire, because he isn’t skilled or efficient enough to bring in more than 10 dollars in return, and the employer will lose money and/or go out of business.

Note: An employer could certainly choose, out of the goodness of his heart, or for some other reason, to continue operation while losing money. There are even some cases where that is preferable to going out of business (see here). However, it is unreasonable to expect most employers to do this long-term, and immoral to force them to do so. If it’s immoral to force people to work (slavery) then it’s immoral to force people to provide work (also slavery).

Therefore, when a minimum wage is put into place, or when it’s increased, it makes the people who are less marketable* the people who will lose jobs because not only will employers likely have additional costs (in training, special accommodations etc) in general, but as the minimum wage narrows the gap between cost and profit (or even total revenue) employers are only going to hire people who have more skills, and are therefore able to produce more or more efficiently.

There have been numerous articles, reports, and research papers written by economists on how raising the minimum wage (since we’re already past implementing one in the first place), hurts the poor (usually the ones with the fewest skills or for whatever other reason are difficult to employ) the most. See below if you’d like to read some.†

A modern-day example of this is McDonald’s considering, or perhaps they’re even past the consideration phase, automating some of the functions in their “restaurants” because minimum wage is becoming so expensive that in the long run the immediate increased cost of developing and buying all of the automation equipment will be offset in the short enough long run in savings from not having to pay such a high minimum wage, pay for health insurance, pay for workman’s comp when people get injured, etc.

*These are people with the fewest skills or who are for other reason not desirable, E.g. people with mental, emotional or physical disabilities, alcoholics/drug addicts, or people who are difficult to get a long with or work with for whatever other reasons.

In conclusion, minimum wage is bad for everyone. It is bad for the poor because they won’t get hired. It is bad for the middle class because inflation caused (something not discussed in this post) by the minimum wage will make things more expensive for them. It is bad for business owners because they will not be able to afford to hire people and still be profitable.

The Minimum Wage is Cruelest to those Who Can’t Find a Job – James A. Dorn, Senior Fellow at the Cato Institute.
The Negative Effect of Minimum Wage Laws – Mark Wilson, Economist at San Diego State University.
Repeal the Minimum wage – Art Carden, Economist at Rhodes College.
Minimum Wages: A Poor Way to Reduce Poverty, Joseph J. Sabia, Economist at San Diego State University.
The Effects of Minimum Wage on Employment Dynamics – Jonathan Meer, Economist Texas A&M, and Anthony West, Economist at MIT.
Let the Data Speak: The Truth Behind Minimum Wage Laws – Steve H. Hanke, at Johns Hopkins University.
Outlawing Jobs: The Minimum Wage – Murray Rothbard, Renowned Economist.
Rape and the Minimum Wage – Matt Zwolinski, Philosopher and co-Director at USD’s Institute for Law and Philosophy.
Does the Minimum Wage Hurt Workers? – Antony Davies, Economist at Duquesne University and Research Fellow at The Mercatus Center.
Unintended Consequences of Price Controls – Antony Davies, Economist at Duquesne University and Research Fellow at The Mercatus Center.
The Minimum Wage Hurt the Young and Unskilled… – Preston Cooper, Policy Analyst at Economics21.
An Economist’s 10 Objections to the Minimum Wage – Mark J. Perry, Economist at University of Michigan.
Minimum Wage, Maximum Automation – Adam C. Smith, Economist at Johnston & Wales University and Stewart Dompe, Economist at Johnston & Wales University.
Low-skilled Workers Flee the Minimum Wage – Corey Iacono, Economics student at Rhode Island University.
Minimum Wage Myths – Milton Friedman,Renowned Economist.

Advertisements

9 thoughts on “On the Minimum Wage

  1. Thanks for this blog post regarding the minimum wage; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

    Liked by 1 person

    • Hi Shrey. Thanks for commenting. I’ll check out some of your posts when I can, and comment. Just so you know, WordPress marked this as spam originally, probably because it sounded like you were commenting just to get your own traffic. I unblocked it.

      Liked by 1 person

  2. I like the article. It makes so much sense put in those terms. It seems remarkable that the government has not yet figured out that they are hurting those whom they seek to help. It almost stands to reason that they cannot possible be unaware of it, and might be doing it intentionally. Thoughts?

    Liked by 1 person

    • Some lower level bureaucrats are probably unaware. Upper-level politicians are either unaware, don’t care because it’s not convenient, or don’t understand the conclusions enough to agree with them. I suppose it’s possible that some are doing it on purpose, but I don’t know how to identify them.

      Like

    • Huh. I thought I responded to this already. I doubt most of them are doing it intentionally to hurt people. Most lower-level bureaucrats probably don’t even understand what’s going on. Upper-level politicians either don’t understand, or don’t care for other reasons than harming people. Perhaps it’s not convenient to their careers. I am sure that it’s possible that some people are doing it on purpose, but nowadays I don’t know how to find that out.

      Like

  3. Good thoughts Jordan!

    I would love to read your blog on a regular basis.

    Keep writing. It was great to see you and your family in church this morning.

    One of the reasons I support Trump is because of wage deflation issues.

    The huge pool of unskilled illegal immigrants has truly hurt those Americans 14 and up who used to work part time during HS and college.

    I would love to see the youth in the US working those jobs. It contributes greatly to a family’s economics and buffers the kid against entitled “me first” thinking.

    Manual labor and manufacturing jobs also motivate some to try harder in college.

    Jenny

    Like

  4. I enjoyed reading your article Jordan. I heard recently on KTAR that there were already states who were proposing the minimum wage increase to $15 on the ballots for this year. A couple states I remember being mentioned were New York and California. Increasing the minimum wage that much is not only not profitable for the business, but it can also cause people not to want to start up businesses because it will be too expensive to pay employees. Another issue this would inevitably cause is that businesses would have to drive up their prices to offset their cost of paying employees a higher wage.

    Liked by 1 person

  5. Thanks for commenting! I agree with you, not only will people probably lose jobs and employers not be able to afford to hire them, but things will become more and more expensive for everyone.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s