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Minimum Wage: Good Intentions, Bad Policy

Minimum wage is supposed to help poor people. That’s why two out of three Americans support raising it to $10 an hour. And that’s probably why President Obama, during his State of the Union Address last Tuesday, called for raising it by more than 20 percent.

But as any logician knows, public support for an idea doesn’t make it true.

Minimum wage has always had public support. When the first federal minimum wage legislation—the Fair Labor Standards Act—was passed in 1938, it was thought to be a major victory for the working class. The idea of protecting workers from the profit-motives of their employers was thought to be humane. But the slightest bit of economic investigation tells a more complex story.

Henry Payne cartoon

Cartoon by Henry Payne

Wages are the price for labor. They are the compensation workers require for their time and efforts. As with any price, regulatory controls—whether a price ceiling or a price floor—distort the market, creating either a shortage or a surplus. If the price of milk is capped at $1 per gallon, grocers will soon run out, as customers buy more than they need while prices are low. If the price of bread is not allowed to fall below $10 per loaf, grocers won’t be able to sell their stock as consumers will wait until prices drop to buy bread.

In the same way, minimum wage—a price floor on labor—creates a surplus of workers. At a price of $7.25 per hour, workers who are willing to sell their labor outnumber business-owners willing to hire them. There is only so much money to go around, and—like the grocery store’s customers—businesses cannot spend more on wages than they earn in revenue. And of course, not every type of labor is the same—some jobs simply aren’t worth paying someone $7.25 an hour to complete.

The result: Fewer jobs and permanent unemployment for those unable to produce more than $7.25 worth of goods for their employers. Hardly a means to help the working class.

Now in real terms, $7.25 an hour is a low wage. In fact, workers earning minimum wage today earn less than those did in the 1950s—before the age of quantitative easing and rapid monetary inflation. But that doesn’t make a minimum wage hike any more justifiable.

Despite the good intentions of its modern-day propagators, minimum wage is a questionable policy that should raise eyebrows for anyone concerned with the plight of the poor. At the very least, think twice before supporting a minimum wage hike. History suggests it might not have Mr. Obama’s intended effect.

  • Anonymous
    I think what you said has quite a bit of truth to it. However, I don’t think minimum wage earners should continue earning the $7.25 they do.

    Take Sweden for example. In Sweden, as I understand it, there is no minimum wage. Kinda strange for the “socialist” country we think it is. However, wages are negotiated through collective bargaining, which ironically has produced higher “minimum wages” than are set here. If I did the calculation correctly, the average Swedish cashier makes around $18.50 an hour. So, it seems that if people were forced to do something about wages themselves, instead of complacently abiding by government regulation, and an organic system of wage settlement was established by the workers, then wages could be even higher here.

    After all – wealth inequality in the US has been sharply increasing since the 1980s and it seems our economy could use more workers with solid incomes buying goods.

  • raul esparza

    but no alternative plan is proposed. education is the key, if that is the answer, then why make it so difficult to pay for higher education. why does the government make a profit on the backs of our kids. where the only jobs are low wage jobs, which have to be supplemented with welfare and food stamps. or work two or three jobs to put food on the table historically these jobs were entry level ,high school kids who would move on , but statistically that is not the case as more and more seniors and working poor are taking these jobs to sustain themselves and their families . education should be key and it should be made affordable to all our youth not only to those who can afford the cost

  • noobiedick

    “If the price of bread is not allowed to fall below $10 per loaf, grocers won’t be able to sell their stock as consumers will wait until prices drop to buy bread” – How does one wait for the price to drop if it is not allowed to?

    Your arguments and their supporting analogies are severely flawed. Neither have you shown any statistical proof you mentioned in your post that minimum wage has failed.

    Not having a minimum wage contributes to the problem of widening income gap. When the middle class are forced below low-income class as the rich gets richer, business stalls as purchasing power of the middle class are severely reduced. This, is what is happening around us right now.

    Having a minimum wage not only ensures that the lower income groups has a minimum level of quality of life, it also ensures that the majority of the population has the spending power to keep the economy going.

    • Don Mcdonald

      you supplied so many facts in your statement as well and zero statistics to back it up…

  • don roberts

    to noobiedick

    Nicholas was not off his mark as you suggest. You claim that by raising the minimum wage it would allow the majority of the population spending power to keep the economy going. What do you think employers and businesses would do if they had to raise the minimum wage? They would obviously raise the price on their products to compensate paying higher wages, thus nullifying more spending money to keep the economy going!!!

  • Joshua Price

    The research I have done has lead me to believe in abolishing the minimum wage altogether. However since we do not seem to be heading down that road anytime soon, I believe raising it beyond $10 would be disastrous. First off a common notion is that if there were to be no minimum wage employers would drive wages down immediately, this is not true take into account European countries with/without minimum wages. The countries without minimum wage have a lower unemployment rate. Sweden actually has a problem because the workers are making more money than their production is worth due to negotiations between employee and employer. Now to my 2nd point as Don Roberts stated with higher wages in such a sudden fashion would drive up the cost of living. Take the south for example we make less on average and minimum wage is also less, but so is the cost of living therefor the two even out. If the minimum wage was raised to $15 an hour what would happen to all the manufacturing and labor jobs where the hourly wage is between $10 and $15, they too would have to raise pay and if we over double the minimum wage from $7.25 too $15 then the same would be expected for everyone and all the problems that could and would come from that are to many in number to currently elaborate on. Lastly jobs in-which one makes a minimum wage are for teenagers and young adults either in high school or paying their way through college. Sadly the main job growth seems to be in these mundane low level jobs in which in recent years higher numbers of older citizens rely upon. I could spend hours on why this is, whether it be high corporate taxes and regulations or lack of individual drive and/or mostly the promotion of the welfare state and the single mother, by these minimum wage employers which in-turn cost the taxpayers. So, these are just a few of many reasons I personally believe that the minimum wage should be done away with and allow free enterprise to reign once again.

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