For seventy years America has struggled with the problem of how to define poverty and to devise a minimum wage law that would guarantee that every working man or woman would earn a rate of pay that would exceed the poverty level. The modern minimum wage law, which sets the lowest rate of pay that can be paid by employers in most cases, sets the rate at $6.55 per hour. The New Deal legislation that had the ideal of providing a living wage for all workers has gone unfulfilled, as the wage is still far below the federal standard for poverty. However, advocates of the law argue that it does give the worker some level of protection against the exploitation of greedy businesses. Opponents contend that the law costs jobs and is an unwarranted and unnecessary intrusion into the affairs of business. In fact, the minimum wage law is an unproductive and unconstitutional law that increases unemployment, does not reduce poverty, and should be repealed.
Labor is one of the few commodities that is marketed in the US that has a price floor, and this artificial subsidy is counter-productive in a capitalist economy. Subsidies on items such as agricultural goods serve the purpose of stabilizing the market during periods of unusual production gluts or shortages. However, this is not the case for labor. The low skilled, low-end worker is subsidized by their co-workers and the employer as a form of economic welfare. For example, an employer needs to hire two people and he has a budget of $13.10 per hour for labor. One of the positions is more skilled, and the other is part time so he would like to hire an $8 per hour employee and a $5 per hour part time worker. However, the law says that he must hire two employees at $6.55 each to stay within his budget. The part time worker receives a $1.55 subsidy from his more skilled co-worker. The employer is faced with hiring a sub-standard employee for the $8 per hour slot, or hiring only one employee. 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” (163-164). When goods, in this case labor, are overpriced the market demand is reduced. Rather than providing a living wage and a job, the minimum wage law drives down the cost of labor and transfers wealth from the lower economic classes to the minimum wage job holder.
In addition to the reduction in demand for labor that comes as the result of mandatory pricing, there is also an oversupply of labor as many people make their services available that may not have been offered at the previous and lower prices. Teenagers, first time job seekers, part time workers, and seasonal workers may drive up the supply as their labor becomes worth more and working becomes more worthwhile. This adds to the evidence that most minimum wage jobs are filled by teenagers working summer jobs, part time help, and entry level workers, rather than coming from a background of poverty or the working poor (Even and MacPherson ii). Rather than increasing wages, the current minimum wage law creates an oversupply of labor and actually keeps wages down.
The US has traditionally been a free market capitalist system, and intervening with an artificial floor on wages that is determined outside the market, reduces total employment in this environment of market economics. Labor, just as goods and services, is subject to the law of supply and demand. According to Ferguson, “The main influence is the pressure of demand on the supplies of goods and services and on the supply of labor. When demand exceeds supply there will be pressure on wages to rise” (215). The law of supply and demand further states that when prices rise, demand falls. This is especially true with prices that are set by a legal mandate. Sowell states, “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” (163). As the cost of entry level and low skilled workers continues to rise, employers will demand fewer of these workers, and the unemployment rate will rise over time.
As the cost of labor goes up, owners are faced with the necessity of cutting costs, and reducing the size of the workforce is generally the preferred method among employers. When labor costs rise the employer needs to bring the total employment costs back into equilibrium and is faced with the choice of reducing total employment, or cutting non-wage fringe benefits (Simon and Kaestner 54). Studies have indicated that employers routinely cut the workforce and lay off workers when faced with a rise in minimum wage, rather than cutting benefits (Simon and Kaestner 67). It should be noted that a rise in minimum wage has a ripple up effect. As the minimum wage goes from $6.55 to $7.25, the workers that make $7.25 will also expect a raise in an effort to maintain their position above the minimum. While the direct effects of a higher minimum wage may seem minimal, the ripple up effect costs corporations billions of dollars and a small change can severely throw the supply and demand curve out of equilibrium. To achieve balance and return to equilibrium, the employer is faced with the inevitable choice of reducing the workforce.
One of the longest and most consistent arguments made against the minimum wage has been founded on constitutional grounds. Since its inception, opponents of the minimum wage have argued that it denies the employer and the worker the right and liberty of contract. The reasoning rests on a 1905 Supreme Court finding that reaffirmed the right of employers and workers to set their own wage agreements. In the case of Lochner v. New York, Justice Rufus W. Peckham wrote the majority opinion, which stated, “The general right to make a contract in relation to his business is part of the liberty of the individual guaranteed by the Fourteenth Amendment of the Federal Constitution…. The right to purchase or to sell labor is part of the liberty protected by this amendment” (qtd. in Hornberger). The mandatory minimum wage makes it illegal for a worker and employer to enter into an agreement to work for less than the minimum. A worker may be willing to work for $5 per hour for their own personal reasons. It could be to gain experience, fill their time, or as a supplement to other income. However, the minimum wage law denies the worker of that fundamental constitutional right.
Supporters of the mandatory minimum wage law state that the law is needed to protect the vulnerable workers from unscrupulous employers who would take advantage of them in a free market situation. In addition, they contend that the increase in wages significantly impacts poverty in the US, as many workers now are remunerated with a wage that approaches a living wage. However, employers that substantially abused their workers by paying slave wages would not be able to attract enough quality workers in a free labor market. They would be forced to bid against their honest counterparts and the workers would be free to choose the higher pay and fairer employer. In this scenario, employers would be forced to reward quality and experience, even among entry-level workers, and may actually benefit the first time or low skilled worker. The current minimum wage is $6.55 per hour, which is $13,624 annually. For a family of four this is less than two thirds the amount needed to reach the federal poverty level of $22,050 (2009 HHS Poverty Guidelines). Raising the minimum wage to the poverty level would be an unrealistic burden placed on business that could result in severe economic hardships and workforce reductions. The minimum wage law does not elevate the worker out of poverty, and in fact it may be counter-productive as it forces wages down.
In conclusion, the minimum wage law is one of those regulations that has some good intentions and several unintended consequences. One of the main drawbacks to the minimum wage law is that it suppresses everyone's wages at the low end of the pay scale. Workers that make just above minimum wage are often left to subsidize the unskilled worker. As the minimum goes up, new workers are attracted to the workplace that may not be willing to work at the previous lower wage. This increases the supply of labor, while the higher cost reduces the demand for workers in the workplace. This results in a glut of entry level, low skilled workers. In an effort to keep labor costs in line, employers are forced to reduce the size of the workforce, which results in an increase in unemployment. While the intention to reduce poverty and protect the American worker is laudable, the fact is that it does neither. It keeps these workers in poverty, and only protects them from their constitutional right to a free contract. The minimum wage law denies the worker their liberty, increases costs to business, and creates unemployment. The unintended consequences of the minimum wage law have created too much burden to bear and should be repealed.
2009 HHS Poverty Guidelines. 2009. US Department of Health and Human Services. 3 May 2009 .
Even, William E., and David A. Macpherson. Wage Growth Among Minimum Wage Workers. Washington, DC: Employment Policies Institute, 2004. 1-18.
Ferguson, Ken. Essential Economics: A Guide for Business Students. New York, NY: Palgrave Macmillan, 2002.
Hornberger, Jacob G. “Economic Liberty and the Constitution.” Freedom Daily. 2009. The Future of Freedom Foundation. 3 May 2009 .
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.
2009 HHS Poverty Guidelines. 2009. US Department of Health and Human Services. 3 May 2009 . This is the government website that establishes the Federal Poverty Level (FPL). The data will be used as evidence that the minimum wage is well below the poverty standard set by the government.
Even, William E., and David A. Macpherson. Wage Growth Among Minimum Wage Workers. Washington, DC: Employment Policies Institute, 2004. 1-18. This is a study made by the Employment Policies Institute (EPI), a nonprofit organization that studies public policy. This study has information regarding the background of the minimum wage worker. It contends that the workers do not come from a poverty background, but are part time, students, and seasonal.
Ferguson, Ken. Essential Economics: A Guide for Business Students. New York, NY: Palgrave Macmillan, 2002. This is a basic economics book that is used to establish the law of supply and demand as it relates to labor. It is used to argue that the law of supply and demand is a workable theory when discussing the minimum wage law.
Hornberger, Jacob G. “Economic Liberty and the Constitution.” Freedom Daily. 2009. The Future of Freedom Foundation. 3 May 2009 . Hornberger is the founder and president of The Future of Freedom Foundation. While this is an independent website, the information I intend to use is historical and factual in regards to a Supreme Court finding. It is not used for opinion or editorial.
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. This is a comprehensive study on how employers react to an increase in labor costs. The study finds that employers are reluctant to cut benefits, and the size of the workforce is the first object of cost cutting. This is evidence that when faced with higher labor costs, unemployment is the result.
Sowell, Thomas. Basic Economics: A Citizens Guide to the Economy. Cambridge, MA: Basic Books, 2004. This is a basic economics book that is the basis for the reasoning that an employer will not pay more for labor than it will produce. Faced with his scenario, the employer will lay off the employee. Sowell contends that the real minimum wage is zero.