Debunking Statist Arguments: The Minimum Wage
Nov 3, 2011 at 5:16 PM
The people of the "Occupy" movements certainly have their hearts in the right place. However, many of their brains are somewhere way off this planet. Though they tend to diagnose problems of corporatism well, their demands are often ultra-statist, unfortunately aligning quite often with what the Washington establishment wants. Indeed, in some cases, implementing the OWS demands would be disastrous. I'll be attempting to debunk these argument one at a time in a series of blog posts.
Argument: We need a living wage! Raise the miminum wage to $20 per hour!
Answer: Raising the minimum wage would actually hurt the people that need help the most. What most people don't understand is that the wage somebody earns is not meant to be an arbitrary number set by government. Rather, it is supposed to represent the price of your skill. The price of your skill, then, is valued by supply and demand. Think of the argument people make about professional athletes -- it offers such a great example. Football, basketball, and baseball players make too much money, they say, and should receive much less. But is this necessarily true?
Economically speaking, it actually makes sense that they earn a high wage. There is a small supply of professional athletes but a huge demand for them to play. Therefore, their skill is priced very high. Similarly, we can look at a janitor's skill and see clearly why he wouldn't make as much money. Cleaning a floor, bathroom, and doing other janitorial responsibilities is not that difficult (this is not meant to belittle janitors, but merely explain why their wages are so low). There is, then, a high supply of people that could be janitors; in fact, the supply is far greater than the demand because basically everyone can do the job. So, what follows? They have a wage that is priced low.
Anyways, this should help us understand why the minimum wage is such a poor policy and that increasing it would be even more devastating. What the minimum wage essentially does is force employers to overprice unskilled labor and therefore have less money to hire another worker. Although it might not automatically result in higher unemployment if we raise the minimum wage because businesses could deflect this strain somewhere else, it is often still case that with an increase in the minimum wage so comes an increase in unemployment. D.W. MacKenzie, assistant professor at Ohio Northern University, explains it best:
The economic case against minimum wage laws is simple. Employers pay a wage no higher than the value of an additional hour's work. Raising minimum wages forces employers to dismiss low productivity workers.
And, to compound the problem, those that suffer the most from this are the poor, minorities, and youth. It should be noted, then, that the minimum wage policy actually hurts the people that need help the most. Yet there is the argument that liberals make which claims that if the minimum wage was eliminated then businesses could all team up and set wages low! But this presupposes a few things. First, the argument assumes that people cannot choose where to work (contingent on their ability to get hired). It is not as if somebody is forced to work somewhere, although you would assume so when someone says corporations "exploit" people. Employers have control over employees only in the sense that they set the skills an employee needs to have to be hired but that is it.
The second problem with this argument is that it does not consider competition between businesses. In order for a company to thrive, it would need talented workers and to employ talented workers a company would need to pay them appropriately. Consider the situation in America today: The average wage in 2010, according to the Social Security Administration, was $20/hour (assuming a 40 hour work week). But if businesses didn't have to pay this much -- if they only had to pay the federal minimum wage of $7.25/hour -- then why did they pay more? Precisely because of competition and the price of an employee's skill.
It should be faily obvious that eliminating the minimum wage , not increasing it, would actually be the correct policy. The only people who would be affected by this would be those working at the minimum wage, the rest would not see a shift in their wages because their skills are appropriately set.
The minimum wage argument has been officially debunked.