Minimum Wage Arguments

• John Vandivier

I have maintained that minimum wage is bad for the economy, but there continue to be various arguments for it. This article will address a few.

The Minimum Wage Was Previously Higher

This argument is hilarious to me because it is in fact an argument from tradition and as such should be more akin to a conservative argument than a liberal one. The argument goes that the minimum wage used to be higher, back in the 60s for example, after accounting for inflation and therefore it should be higher now. There is no validity to this argument. Were times better back then in the 60s? Was the economy any better? Were there less poor people? Some articles, <a href="http://www.npc.umich.edu/poverty/">like this one, will try to make the argument that there were in fact less poor. That article and many other like it are laughably methodologically erroneous. In my informed opinion it is entirely unclear that minimum wage has ever historically reduced the number of poor. Therefore this argument fails to imply that it should be raised today.

Minimum Wage Isn't Enough to Live On

This argument is sometimes true and sometimes false. Minimum wage is sometimes, but not frequently, enough to live on. This entire argument is a red herring. Minimum wage jobs are not lifetime jobs. The average worker will <a href="http://finance.townhall.com/columnists/politicalcalculations/2013/01/27/visualizing-the-2012-distribution-of-income-in-the-us-by-age-n1498712/page/full">double their income over their working life.

Minimum wage jobs are gateway jobs to higher wages, like internships. To a degree, a minimum wage worker is paying their employer for the right to earn experience. The employer is incurring a training cost and the low skill employee's labor at a reduced wage makes up for this.

We also need to be careful about want versus need here. <a href="http://www.raisetheminimumwage.com/facts/">This pro-minimum wage site argues that because a minimum wage worker cannot afford a 2 bedroom apartment, minimum wage does not constitute a living wage. First, I found that a minimum wage worker can afford a 2 room apartment in several places. Secondly, why does a minimum wage worker need a 2 bedroom apartment to live? Even with a child or two a 1 bedroom can still work.

The bottom line is that poor people need to cut costs where they can. I've been there. I went to college and ate ramen for a while. I couldn't afford to eat out or go to Starbucks. Lack of Starbucks, eating out, ownership of a house or a car should not be perceived as an offense to the poor. Instead, luxury goods like those should be incentives for the poor, and if they don't care about such things then they should be considered willing poor. This is another issue that people overlook. They assume that every person working for low wages isn't doing so willingly - which is quite contrary to the evidence presented by the fact that they are engaged in such an activity.

Finally, creating a minimum wage doesn't solve the living wage problem. Two guys working for $8 may be all an employer can afford. In that case a minimum wage of $10 may result in one getting fired. It may improve conditions for one and worsen them for the other and worsen them on average. This may provide a living wage for the one, but an even worse wage for the other. Worse yet, with one employee the business may reduce output. This could increase prices across the economy or result in the long term close of business as profits drop which could end up producing a living wage for no one.

Minimum Wage Doesn't Necessarily Cause Unemployment

This argument is actually completely true. The best evidence for this argument is a technically good, but poorly interpreted, Berkeley study which can be <a href="http://laborcenter.berkeley.edu/blackworkers/work_dignity.shtml">found here. The study proves, with good methodology, that minimum wage does not necessarily cause unemployment. In fact, it proves there are cases in which unemployment is reduced by a minimum wage because minimum wage can reduce employee mobility which in turn reduces employer turnover costs. It's a strange argument, but sometimes it holds.

What that article doesn't go into is the fact that whether the economic damage is direct unemployment or not, minimum wage nearly always produces some sort of economic <a href="http://en.wikipedia.org/w/index.php?title=Deadweight_loss&oldid=594505259">deadweight loss. This loss is usually measured in terms of expected unemployment out of convenience and for the sake of a consistent comparison. Perhaps we should call it "dead weight loss in expected unemployment equivalent units" or something.

<a href="http://www.washingtonpost.com/blogs/wonkblog/wp/2013/02/14/why-economists-are-so-puzzled-by-the-minimum-wage/">This article reveals that the balance of the literature does not agree with the Berkeley study in advocating for a minimum wage, although it does agree that minimum wage does not always directly cause unemployment. There are numerous other results from a minimum wage and they are nearly always bad, except for the rare and weird example I mentioned before. Responses include:

  1. The business fires employees.
  2. The business stops hiring new employees.
  3. The business cuts wages of other employees.
  4. The business stops increasing the wages of other employees.
  5. The business cuts benefits.
  6. The business may require workers to work harder and take on new duties.
  7. The business may bring online some new technology or other change to improve efficiency (which would have otherwise increased productivity, but is now only able to maintain productivity because it is countered by negative wage effects.)
  8. The business raises prices (hurting consumers).
  9. The business may eat the loss in profits (encouraging the long-term close of business).
  10. Many other possibilities.
  11. Some combination.
I think the problem with the argument that the minimum wage doesn't always cause unemployment is twofold:
  1. It may not cause the unemployment rate to increase, but it often does, and it also contributes to the prevention of the drop in that number.
  2. Even when minimum wage does not directly cause unemployment it creates a host of other issues, the negative impact of which may properly be discussed in \"unemployment equivalent units\" for the sake of comparison.