Guest Commentaries:
Minimum wages and ‘living’ wages
by
Jamie Smith
DBJ Contributing Editor
At the risk of being accused of preaching to the choir in a business publication, I thought this issue should be addressed on
the off chance some go-getter high school type might read it. Most high schoolers and many politicians are not well trained in
economics, and so an emotionally appealing argument does not always have a good countervailing logical opposite position. Here
goes.
As usual, being an election year, the subject of raising the minimum wage is in the news. Of course this would sound great
to those either (a) on minimum wage, (b) with no knowledge of economics or (c) with no understanding of what a minimum
wage actually accomplishes. A large number of citizens (i.e. eligible voters) are encompassed by these choices. So, naturally,
politicians want to appeal to them.
Raising the minimum wage is a simple concept to understand and discuss, from one tandpoint. The argument goes that folks
earning a minimum wage should have a better standard of living, etc., and raising it would help them out. Each person looks at
it and thinks, ‘hey I’d get more, so I’ll be better off.’ As far as they are concerned, the case is closed, and that guy gets that
vote. Part two of that argument is that if you oppose raising the minimum wage, it’s because you are a ‘cruel and heartless
poor people hater’ who would dance on their graves if you could. How dare you. In the face of that highly emotional character
assassination, lots of politicians just fold up even though they know better. This second part clouds the issue, intentionally.
Now, if just one worker got his wage raised, then all else would remain equal and that one worker would definitely be better
off. That is, of course, how people think about the issue: about themselves and not the whole economy. However, if the
minimum wage is raised for everyone, then everything does not remain equal and the change will have a ripple effect through
the economy as a whole. While the effect would vary for individuals, if you look at the population as a whole the reaction of
the marketplace becomes evident.
The problems are many. Raising the minimum wage would help out some workers in the short term, but would cost others
their jobs in the long term as companies found cheaper alternatives such as automation. Raising it by 10 cents wouldn’t really
help anyone, but neither would it have a great impact in a negative way. So why not raise it to $6.50 per hour? Maybe
that’s not enough in the minds of some. Why not $20 per hour? At that rate, anyone can see that employers would cut out some
employees, keep only those they absolutely had to have and automate what they could. If they could not do those things then
they would be forced to raise prices to compensate. If the market wouldn’t pay the higher prices, the company might be forced
to close and everyone is out of work.
The problem in economic terms is that a raise in the minimum wage would mean increased costs of production, which in turn
would mean increased prices. The cost of an employee to the company is not just the wage. The cost would include all those
employment taxes like social security, unemployment compensation and such, which are based on a percentage of the wage.
Some unionized firms face higher overall labor costs since union contracts specify that wages will be tied to the minimum
wage. If that rises then union workers’ pay will rise accordingly, either one to one or by a percentage. Rather than layoffs,
another way for a company to offset the increased costs and earn the same profit is to raise prices. Economy wide, in real
terms of value, no one would be better off as increased prices would counter the increased wages of the workers.
Finally, workers with no experience or skills would find employment difficult, since employers would not want to pay a
higher wage to train them. A low wage means those who need to learn skills or establish a work reputation can land a job. The
minimum wage is supposed to be an introductory wage. Once workers learn skills and/or establish a work reputation, they
will be able to earn more. The value of the job and the value of the employee is ‘negotiated’ by the wage. If the wage is raised,
fewer will have the opportunities to do that.
The “Living Wage” is the newest spin on gaining voters’ ears. It makes a great sound bite, but many politicians are fairly
vague on what they mean by it. Does it refer to the main provider for a family of four in New York City or to a high school
student living at home in Greenwood looking for part-time work? Obviously, a one-size fits all “living wage” arbitrarily set
won’t work. The ‘living wage’ is simply a repackaging of the minimum wage issue. The ‘living wage’ makes fodder for great
speeches and really whips up support, but when you try to put hard numbers on it, it makes no sense.
The minimum wage (meaning a low wage) does accomplish a meaningful economic purpose - it provides an entry point to the
workforce for unproven or unskilled potential employees. A low minimum wage would mean the high schooler or inexperienced
person could find a job of some sort. From that beginning he can learn about work and job responsibilities and he can use that
experience to help focus his studies in high school and college. By doing that he can make himself worth more to employers so
that one day he can provide a comfortable existence for his family of four (hopefully here, not NYC). If the minimum wage is
raised, then it will become more difficult for that person to find work. When once he could have been watering plants for a
greenhouse, after the raise maybe the greenhouse puts in a sprinkler system and eliminates the job forever.
What is at work behind the effort to raise the minimum wage is a basic difference in philosophies. One side says that workers
are ‘owed’ a ‘living’ wage. The tenet here is that the people should be given jobs and should be paid so they can live however
they want. The other side says that people should be responsible for their own lives, educate themselves, work hard,
improve themselves and earn as good a living as they want. The key word here is value.
A person should strive to be valuable to the employer. The job may require a highly skilled person. That skill set would earn
a higher wage. An unskilled job that anyone can do would earn a lower wage. A person in that position though has the opportunity
to prove himself valuable to the employer by demonstrating a good work ethic and/or learning other jobs. That person
in the unskilled position then becomes more valuable to the employer and over time will get a higher wage. If the employer
doesn’t raise that person’s pay, then the worker has a good work history and skills and can go get a job with another employer
who will pay more.
The basic philosophical conflict here is whether individuals are responsible for their own lives. One side is appealing because
it seems right from an emotional standpoint. Raise the minimum wage and you are helping people out. The other is hard and
logical, and unfortunately not very appealing. It points out the logical economic consequences of raising the wage and, of
course, requires one to look in the mirror to see who is responsible for your life. DBJ
