Introduction and Nature of the Minimum Wage Policy
Few laws have been as contentious throughout every aspect of society as the Minimum Wage Law has during its 71-year history. The Minimum Wage Law has been a set of contradictions since its inception and has continued to be a polarizing issue among economists, politicians, and social activists. The depression era law was passed with the promise of creating a minimum standard of living for all workers and their families, and as a means to stabilize the economy by acting as a subsidy for the lowest paid wage earners. Yet, the promise remains unfulfilled as many workers continue to work and live in poverty, and the economy is still subject to periodic fluctuations and the risk of another Great Depression. Social activists maintain that the law is needed to prevent workers at the lowest end of the pay scale from being exploited by greedy businesses and heartless corporations. Economists argue as to whether the law might reduce employment and actually be counter-productive in regards to the needs of the poor. Politicians seek to ideologically justify the law to small businesses that must pay part time workers or teenagers a scale above what the market would demand, and convince the consumer that the law is not inflationary. The purpose of this paper is to examine the various issues surrounding the Minimum Wage Law and make a determination on the best approach to manage the low end wage earners, while working within the constitution and ideological constraints of capitalism.
The issue of a minimum wage has been the subject of intense analyzation and research in regards to its effect on employment and the economy. The law, as described by advocates, was intended to provide all workers and their families with a minimum level of pay that would offer them a subsistence wage. However, the minimum rate of pay required by law falls well below the poverty level, and future attempts to increase it will be met with considerable political resistance in the current economic and employment climate. The 'New Deal', and its associated recovery programs, were viewed by some as “a drastic control of capitalist exploitation, involving a socially planned economy in which the depersonalized pursuit of private profit is subject to check at a thousand strategic points” (MacIver 836). Traditional capitalists contended that the law contributed to inflation, created unemployment, was harmful to business, as well as being opposed on philosophical and constitutional grounds.
No matter how the issue is presented, it is in opposition to the free market economics that have been the tradition of the United States. However, the public does have an obligation to implement policies that may be a necessity or that can show a significant benefit/risk reward, even when it is counter to the traditional ideology of capitalism. The question regarding the minimum wage law is therefore threefold. First, is it a necessity that alleviates suffering, hunger, or inhumane hardship? Second, is there a significant economic reward gained by the public, and individuals, at a minimum cost? Third, can the same outcome be reached by another method that is less intrusive and coercive? Analyzing the history, data, and thinking regarding the minimum wage law will reveal that there is little economic gain from it, it is overly coercive, and may in fact be a net negative gain for all the stakeholders involved.
Relevant Philosophical and Constitutional Issues
The federal laws regulating minimum wage were initiated in 1938, but the concept took hold decades earlier in several states. Numerous state laws enacting a minimum wage in the two decades prior to the federal act preceded the federal mandate for a minimum wage that was passed as part of the Fair Labor Standards Act in 1938. By 1924, eleven states had passed minimum wage legislation and it was being argued that the laws violated the Fourteenth Amendment due to their interference with the “right to the acquisition of property”, as well as the “freedom of contract of both employer and employee” (The Legislative Minimum Wage 1015). Since that time social liberals, unions, and organizations that are fighting poverty have generally favored the law, while opponents have typically been comprised of business concerns and political conservatives that oppose any type of government interference in the economy. Some states have passed laws that set a minimum wage rate above the federal rate of $6.55 per hour, and the higher rate takes precedent over the lower federal standard.
There are few other commodities that have a minimum price set by law as does the market for labor. Agricultural products are granted subsidies to stabilize the price during years when the weather or natural events can have a severe impact on production. Still, subsidies are viewed as an unfair advantage in the today's market of globalization. Likewise, employers who must subsidize the workforce by paying wages above the market minimum protest that they are placed at an unfair disadvantage when competing against other global regions. It additionally places an unnecessary restriction on the worker. William Howard Taft once wrote that “Legislatures in limiting freedom by contract between employee and employer by a minimum wage law proceed on the assumption that employees, in the class receiving least pay, are not upon a full level of equality of choice with their employer and in their necessitous circumstances are prone to accept pretty much anything that is offered” (qtd. in Woloch 163). The minimum wage law is, in effect, some of early beginnings of a nanny state where government regulations began to assume the role of the free market. While the intentions may have been honorable and an honest attempt to instill fairness in the worker/employer negotiations, the unintended consequences have had the opposite effect. The basic philosophical problem with the minimum wage law is that it must apply to everyone. The worker who wishes to bargain for his own labor is unable to do so and is thrown into a pool where workers are undifferentiated, and subsequently treated as such.
The Economic Reasoning and Effects of the Minimum Wage
One of the critical questions surrounding the minimum wage issue is whether or not it discourages or prevents employers from hiring low level and unskilled workers. The basic law of free market economics states that “a price artificially raised tends to cause more to be supplied and less to be demanded than when prices are left to be determined by supply and demand in a free market” (Sowell 163). A higher minimum wage will attract more workers that may otherwise choose not to work. These workers will come from people seeking a second job, summer employment, or part time work. The increase in supply will not come from the core wage earners who are already employed out of necessity. These additional workers will cause a supply surplus and the minimum wage will hit the real level of zero, in the way of unemployment. According to Sowell, “Making it illegal to pay less than a given amount does not make a worker's productivity worth that amount – and, if it is not, that worker is unlikely to be employed” (Sowell 163-164). From an economic standpoint, a business cannot remain in business if they are forced to pay a wage rate that is above what the employee returns in revenue. The employer is forced to either lay the person off, or reduce the wages of his other workers to subsidize the minimum wage earner.
The debate surrounding the minimum wage has grown even more intense in the current climate of unemployment, the need for job creation, fears of inflation, and the vitality of the small business. The minimum wage is set to increase again on July 24, 2009 to a level of $7.25, a $2.10 increase over the 2007 rate that will affect 12.5 million workers (Fox 1). Supporters of the increase claim it is still too low and have called for even steeper rises in the wage scale of the lowest paid workers. In 2004, Democrats in the US Senate that were in favor of a higher minimum wage proclaimed that “low-income workers have faced greater poverty and even growing hunger, while corporations and wealthy Americans reaped the benefits of multiple tax breaks and saw profits soar” (Minimum Wage). Critics contend that most of these minimum wage earners are unskilled teenagers, and the law has little relevance to poverty. They argue that the primary beneficiaries of the minimum wage law are part time workers, new entrants, and teenagers working summer jobs that do not come from a background of poverty (Even and Macpherson ii)). Wages are diverted from the full time worker making just above minimum wage to the part time teen that is worth less than the minimum wage under a free labor market. The full time employee remains in poverty and business is burdened with an additional $50 billion per year in labor costs. This intense debate rages on as the highly polarized positions spin the statistics to support their emotional claims and justify their personal views.
Critics of the minimum wage law often cite its fault as being redistributive and therefore unjust. It is a typical case of the haves versus the have nots and the conflict over the division of resources. However, it is not the class conflict that is often portrayed in the media. In this case there is the businesses, usually small or fast food restaurants, competing with the poverty class. However, it is not this class of people that are the strongest supporters of the law. According to Hayes, “the more a proposed redistribution stands to benefit people at the bottom of the income ladder […] the more likely it becomes that the potential beneficiaries will fail to mobilize at all” (466). In fact, the law has languished for long periods in its history and has generally failed to keep up in terms of real dollars. Though there is a widening gap between rich and poor, the minimum wage policy has not been affected to any great degree. It is only periodically when the labor unions get involved that “the minimum wage issue is incorporated into the ongoing struggle between labor and business over shares of national income” (Hayes 470). However, the minimum wage is not set according to any “rational economic objectives”, and only serves to “reflect changes in the relative power of business and labor” (Hayes 470). There is no consideration for the net income gain for the workers, either individually or as an aggregate group. Neumark and Wascher argue that “wages rise for those who remain employed, but employment and hours decline, resulting in a net negative overall effect of the minimum wage on labor income among these individuals” (87). There is a net loss of employment as well as a net loss of income going to the poverty class. Neumark, Schweitzer, and Wascher further state that “there are hours reductions among employed workers that, coupled with small disemployment effects, generate net losses in earned income” (449).
The high cost of fringe benefits has placed greater significance on relatively small shifts in the minimum wage. Businesses are required by law to grant fringe benefits on a non-discriminatory basis to their full time workers. If the business is labor intensive and utilizes a large unskilled workforce, the firm will continue to hire employees until the last workers marginal revenue is equal to the employer's marginal labor cost for that employee (wages plus benefits). When the minimum wage increases, the marginal labor cost rises and the employer must either “reduce employment until marginal worker productivity is increased by a sufficient amount, or reduce the non-wage part of compensation” (Simon and Kaestner 54). Simon and Kaestner further state that their evidence from an extensive study revealed that fringe benefits were not cut when minimum wages were increased, and that specifically extended to “the receipt of health insurance, on whether the employer paid the whole premium cost, on whether family health insurance was provided, and on receipt of employer pensions” (67). Thus, the only alternative left for the employer is to reduce the size of the workforce to bring the labor cost back into equilibrium. In their comprehensive study, Neumark and Wascher refute several previous studies and report that “the oft-stated assertion that the new minimum wage research fails to support the conclusion that the minimum wage reduces the employment of low-skilled workers is clearly incorrect” (163). They conclude that “the preponderance of the evidence points to disemployment effects” (163). Employers will act out of economic necessity, and cost cuts will, in all likelihood, be at the expense of the minimum wage earner.
The reduction in workforce size and the resulting unemployment is an ongoing process, rather than a spurious initial spike. According to Neumark and Wascher, “there is substantial empirical evidence that the disemployment effect of an increase in the minimum wage may occur with a lag of one year or more” (35). This results in a gradual cutback as hours are reduced and workers are moved from full time to part time. Research confirms that “minimum wages reduce full-time employment and increase part-time employment of teenagers and adult males” (Neumark, Schweitzer, and Wascher 428). This confirms earlier research by Neumark et al. in 1998 that reported “minimum wage increases had beneficial effects on low-income families contemporaneously, but adverse effects after one year” (Neumark, Schweitzer, and Wascher 432). These facts can only be revealed through long term and ongoing research.
The minimum wage law eliminates the ability of the pay scale to define a job. Higher paying jobs have certain expectations based on the level of pay. However, all low skilled and low wage jobs are grouped together under the minimum wage and they are not differentiated. As the minimum wage is implemented or increased, the lowest skilled workers benefit the most, but after time the lower skilled are unable to compete with higher skilled workers seeking the same job (Neumark and Wascher 91). Once again we see the effects of time as “we find that contemporaneous effects overstate the wage gains and understate the hours and income losses experienced by low-wage workers when minimum wages rise” (Neumark, Schweitzer, and Wascher 449). In an effort to remain competitive, small firms will adopt a number of different strategies. These may include layoffs, but a study in the UK reported that “the most notable adjustments made by employers centred on efforts to increase the number of tasks workers were expected to undertake and the number of machines they were expected to mind. Reductions in overtime working were also in evidence” (Heyes and Gray 211) In addition, Heyes and Gray also noted that “employers had responded by increasing discipline, dismissing (or threatening to dismiss) poor performers and intensifying work effort” (212). The minimum wage law is hitting the worker from all sides. They are losing hours and overtime, while being worked harder and existing under the tension of threatening conditions.
The minimum wage law, aside from creating unemployment, reduced hours, and underemployment, perpetuates the poor employment outlook for the unskilled minimum wage workers. The minimum wage is a two-edge sword. Raising the minimum wage has been shown to reduce the labor demand of employers. In addition, because more workers are attracted to these jobs at the higher wage, there is an increase in supply. Through no agreement between the employer and the worker, the worker must remain unemployed. “Some unemployed workers would gladly work for a lower wage but cannot find a job, and some employers would be happy to hire workers at a lower wage but the law forbids it” (Rocheteau and Tasci 2). The inability of these workers to take a job at a rate of pay that they would accept pulls money out of the poverty class and reduces the overall economy. This redistribution of wealth is counter-productive as it is extracted from the lower class and not recirculated up to the upper classes. It, in effect, is dead wood that contributes nothing to the growth rate of the economy.
The minimum wage law does little in the way of elevating the unskilled and uneducated worker out of poverty. According to Sowell, “minimum wage laws are almost always discussed politically in terms of the benefits they supposedly confer on workers receiving those wages” (163). In fact, as has been shown, the minimum wage law actually reduces employment and reduces the income available to the poverty class. In essence, the law functions as a reverse welfare program whereby money is extracted from the poor and left on the table. Low paying jobs have traditionally been the first step into employment and are often viewed as a means to gain experience and the opportunity to grow out and above the initial position. However, when the escalating minimum wage eliminates these positions, workers have few entry points into the employment system. According to Bartlett, “low-pay jobs are the first rung on the economic ladder of success for workers entering the labor force. When we cut off the bottom rung by increasing the minimum wage, we keep youngsters from making the transition to work” (9). These youthful workers that are denied employment will necessarily become a burden on the economic system in some other fashion.
Conservative opponents of the minimum wage law often cite the fear of inflation as a reason to abolish the minimum wage law. Inflation is the result of either an increase in the producer's cost of a product, shortage of a product, or an increase in the demand. Opponents contend that the increased cost of labor would add significantly to the cost of goods that would be passed along to the consumer. In addition, the higher wages would result in more disposable income and create a higher demand for products. However, the increased demand would be offset by the lowered rates of employment and the shorter hours worked. The increased cost of labor for the estimated 12.5 million people earning minimum wage would be $50 billion if they were given a $2 per hour raise, and while not insignificant, represents only four tenths of a percent of the gross domestic product (Fox 1; Gross Domestic Product: Fourth Quarter 2008). Though there is not a direct correlation between the .4 percent of GDP and the rate of inflation, it is an indication that the US economy is substantially robust as to be able to absorb the increased cost with minimal impact.
Supporters of a higher minimum wage have contended that raising the wages of the working poor puts more money into the economic system and is actually a net plus for the system. A low paid worker who suddenly gets a $1 per hour raise will spend the money in the local economy and the increase will act as a stimulus. Businesses will do better, which will more than offset the higher wages that they pay. While this would be true if all other things remained equal, that simply is not the case. As has been shown, money is actually extracted from the lower classes and left as dead wood. Workers are tasked with higher productivity, tension in the workplace, and shorter hours. The increase in stress could potentially be associated with future health problems. These all result in increased costs to the individual and society.
For social activists, the minimum wage law has been a work of good intentions that had severe unintended consequences. For political conservatives, the minimum wage law violates some of the fundamental beliefs in the capitalist ideology. Economists generally are in agreement that the law violates the basic laws of supply and demand and can only work to do harm to the economy. Yet, the concept prevails and the minimum wage gets scheduled increases with routine frequency. Even with the apparent lack of support, the measure still finds enough support to pass. Research has shown that the law is not mobilized by the lower classes, or those who stand the most to gain in this apparent class struggle. It is the labor unions that provide the necessary momentum that sustains the rising minimum wage. The conflict over the minimum wage is a struggle between labor and management, without any regard for rational economics or the plight of the class that it is meant to serve.
The minimum wage law extracts wealth from the lower classes in a variety of ways. It results in higher unemployment when employers are forced to lay off workers in an attempt to reach equilibrium in their labor costs. While it is intuitive to think that benefits would be cut to accommodate this, it simply is not the case. Workers are burdened with shorter hours, elimination of overtime, higher production demands, and increased disciplinary measures as employers seek to maintain costs. This wealth is extracted from the lower classes and is not redistributed. It is pulled out of the economy and remains simply dead wood. Meanwhile, the wages still do not raise the family out of poverty.
One of the alternatives to the minimum wage law that has been suggested is an enhanced Earned Income Credit (EIC). This tax credit formula mediates the distribution of wealth by rewarding the family wage earner who works and make only a subsistence wage. The formula is such that the more the worker earns, the more EIC they are awarded, up to a point. After that point, the EIC begins to diminish and at some point is reduced to zero. Under this program, the worker with a family can get a significant raise only if they are a member of the working poor. Because it is a tax credit, it does not involve employers or labor costs. While this may be an acceptable alternative it also has some drawbacks. As the worker earns more money beyond a certain amount, the amount of EIC is reduced. This works as a disincentive to earn beyond the point where the maximum EIC is realized. In addition, conservatives have criticized the program as being a tax supported welfare program and should not be connected to the Internal Revenue Service.
In conclusion, it appears as though the minimum wage is here to stay. This places government leaders in the untenable position of either freezing the current rate or expanding the wage scale. Either way it will reduce the wealth of the working poor. In the long run, the only adequate solution would be to have wages negotiated on an individual basis in a free labor market. This would require a citizenry that is responsible enough to manage their own affairs, and a corporate structure that has a responsibility to treat their workers fairly. Responsibility and prudence have been noticeably scarce in today's free markets. Without them, the poor will remain poorer and the rich will struggle to hang on. Only when we accept the social and individual responsibility that capitalism places on us will we be able to solve the paradox of the minimum wage law.
Bartlett, Bruce. “Minimum Wage Is Bad Policy.” Human Events 14 Feb. 2005: 9.
Even, William E., and David A. Macpherson. Wage Growth Among Minimum Wage Workers. Washington, DC: Employment Policies Institute, 2004. 1-18.
Fox, Liana. “What a New Federal Minimum Wage Means for the States.” Economic Policy Institute Issue Brief 234 1 June 2007: 1-2.
“Gross Domestic Product: Fourth Quarter 2008.” “Gross Domestic Product: Fourth Quarter 2008” Bureau of Economic Analysis. 26 Mar. 2009. US Department of Commerce. 16 Apr. 2009 .
Hayes, Michael T. “Policy Characteristics, Patterns of Politics, and the Minimum Wage: Toward a Typology of Redistributive Policies.” The Policy Studies Journal 35.3 (2007): 465-80.
Heyes, Jason, and Alex Gray. “Small Firms and the National Minimum Wage.” Policy Studies Journal 25.3 (2004): 209-25.
MacIver, R M. “Social Philosophy.” The American Journal of Sociology 39.6 (1934): 835-41.
“Minimum Wage.” “Democratic Staff of the Committee on Health, Education, Labor and Pensions Committee United States Senate” Almanac of Policy Issues. 1 July 2004. US Senate. 16 Apr. 2009 .
Neumark, David, and William L. Wascher. “Minimum Wages and Employment.” Foundations and Trends in Microeconomics 3.1-2 (2007): 1-182.
Neumark, David, Mark Schweitzer, and William Wascher. “Minimum Wage Effects throughout the Wage Distribution.” The Journal of Human Resources 39.2 (2004): 425-50.
Rocheteau, Guillaume, and Murat Tasci. The Minimum Wage and the Labor Market. Cleveland, OH: Federal Reserve Bank of Cleveland, 2007.
Simon, Kosali I., and Robert Kaestner. “Do Minimum Wages Affect Non-Wage Job Attributes? Evidence on Fringe Benefits.” Industrial and Labor Relations Review 58.1 (2004): 52-70.
Sowell, Thomas. Basic Economics: A Citizens Guide to the Economy. Cambridge, MA: Basic Books, 2004.
“The Legislative Minimum Wage.” Harvard Law Review 31.7 (1924): 1013-17. Woloch, Nancy. Muller v, Oregon: A Brief History. Boston: Bedford St. Martins, MA.