Minimum wage

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The minimum wage is the lowest wage that an employer may legally pay their workers. It is a socialist policy meant at manipulating labor wages in the private sector economy. Minimum wage laws are generally presented as being in the best interest of workers, as with the argument that if they can't pay you any less than a certain amount then you are guaranteed to get that amount. In practice, what employers really do is often simply not to hire you at all:

  • The Employment Policies Institute, a business-friendly non-profit based in Washington, D.C., argues that “economic research has shown time and again that increasing the minimum wage destroys jobs for low-skilled workers while doing little to address poverty.” [1]

More than 90% of countries -- most of which have unsuccessful economies -- have minimum wage laws. The minimum wage in the United states was most recently raised to $7.25/hr, on July 24, 2009. At this rate, a worker can earn at least $15,080.00 for the year based on a 40-hour work week, and more if he works overtime. The minimum wage is higher in many states, such as New Jersey, due to state minimum wage laws. The national minimum wage laws are based in the the powers vested in Congress by the Commerce Clause.

Like all market forces, wages are payed based on interactions between the supply curve (how much workers are willing to supply a particular type of labor at a certain wage) and a demand curve (how many workers of a particular type a firm is willing to hire at a particular wage). Wages are typically set at equilibrium. If a minimum wage is imposed that is above this equilibrium, it leads to structural unemployment. If a minimum wage is set below the equilibrium point, it is unlikely to affect that job's wage unless a complement or substitute job's equilibrium wage is less than the minimum wage (causing ripple effects throughout the related markets).

Minimum wages also distort the equilibrium for non-wage benefits, potentially causing employers to provide less training, uniforms, opportunity for promotion, and pleasant working conditions, both as a way of offsetting their losses from the wage increase and because the excess labor supply from unemployment lowers the disincentive for turnover.

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Economic views

Milton Friedman said that minimum wage laws hurt the very people they are supposed to help, that is, the people with the lowest incomes. In one example he gave, it was a form of protectionism designed to help northern textile manufacturers at the expense of textile workers in the south.

I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse. Take, for example, the minimum wage, which has the effect of making the poor people at the bottom of the wage scale—those it was designed to help—worse off than before.
If you really want to get a feeling about the minimum wage, there’s nothing more instructive than going to the Congressional documents to read the proposals to raise the minimum wage and see who testifies. You very seldom find poor people testifying in favor of the minimum wage. The people who do are those who receive or pay wages much higher than the minimum. Frequently Northern textile manufacturers. John F. Kennedy, when he was in Congress, said explicitly that he was testifying in favor of a rise in the minimum wage because he wanted protection for the New England textile industry against competition from the so-called cheap labor of the South. But now look at it from the point of that cheap labor. If a high minimum wage makes unfeasible an otherwise feasible venture in the South, are people in the South benefited or harmed? Clearly harmed, because jobs otherwise available for them are no longer available. A minimum-wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.[1]

Political views

The left wing in American politics tends to present a minimum wage as benefiting the lower class by helping to lift poor people out of poverty. Conservatives and libertarians generally counter this argument with statistics showing that every increase in the minimum wage has increased unemployment, especially among black inner city youth; see entry-level jobs. It also obliges companies to outsource many jobs to China and the Third World.

Fiscal conservatives tend to oppose increases in the minimum wage because in a free market, the price of labor, like any other commodity, should be set by negotiations between the buyer and seller without undue interference from the state. Conservatives oppose the distortion caused by a minimum wage in encouraging boys to drop out of school, or otherwise decline to go onto college, in order to make artificially inflated and short-lived income at an elevated minimum wage. The fact that some in the lowest income bracket will gain slightly from minimum wages (by having their wages raised) while others will lose significantly (from losing their jobs) means that minimum wages can be seen as increasing inequality.

Socialists, and many economic liberals, disagree with this view of labor as a commodity because they believe it dehumanizes laborers by permitting companies to pay employees less than necessary to live a decent life, support a family, etc; see living wage. Even without legislation, the minimum wage as of 2007 is far below the lowest wage paid by most large companies.[2]

Empirical evidence from the 2009 recession

The 2009 recession gave a compelling picture of how an excessive minimum wage can exacerbate the employment climate. None of the five states with the lowest unemployment rates in May 2009, all below 5.5%, had a minimum wage higher than the federal minimum wage of $6.55. Five of of the six states with the highest unemployment rates, all above 11.2%, had minimum wages above the federal minimum wage. Oregon, with a minimum wage of $8.40, had an unemployment rate of 12.4%. Generally, states with a higher minimum wage than the federal minimum wage had unemployment rates that were higher than states that did not have a higher minimum wage.[3][4]

State Minimum Wage prior to 7/24/2009 increase Unemployment Rate as of 5/2009 Minimum Wage Rank Unemployment Rate Rank
Nebraska $6.55 4.4% 1 1
North Dakota $6.55 4.4% 1 1
South Dakota $6.55 5.0% 1 3
Wyoming $6.55 5.0% 1 3
Utah $6.55 5.4% 1 5
Iowa $7.25 5.8% 31 6
Oklahoma $6.55 6.3% 1 7
Montana $6.90 6.3% 23 7
New Hampshire $7.25 6.5% 31 9
New Mexico $7.50 6.5% 42 9
Louisiana $6.55 6.6% 1 11
Arkansas $6.55 7.0% 1 12
Kansas $6.55 7.0% 1 12
Texas $6.55 7.1% 1 14
Virginia $6.55 7.1% 1 14
Maryland $6.55 7.2% 1 16
Vermont $8.06 7.3% 49 17
Hawaii $7.25 7.4% 31 18
Colorado $7.28 7.6% 38 19
Idaho $6.55 7.8% 1 20
Connecticut $8.00 8.0% 45 21
Delaware $7.15 8.1% 25 22
Minnesota $6.55 8.2% 1 23
New York $7.15 8.2% 25 23
Pennsylvania $7.15 8.2% 25 23
Arizona $7.25 8.2% 31 23
Massachusetts $8.00 8.2% 45 23
Maine $7.25 8.3% 31 28
Alaska $7.15 8.4% 25 29
West Virginia $7.25 8.6% 31 30
New Jersey $7.15 8.8% 25 31
Wisconsin $6.55 8.9% 1 32
Missouri $7.05 9.0% 24 33
Washington $8.55 9.4% 51 34
Mississippi $6.55 9.6% 1 35
Georgia $6.55 9.7% 1 36
Alabama $6.55 9.8% 1 37
Illinois $8.00 10.1% 45 38
Florida $7.21 10.2% 30 39
Indiana $6.55 10.6% 1 40
Kentucky $7.25 10.6% 31 40
Tennessee $6.55 10.7% 1 42
District of Columbia $7.55 10.7% 43 42
Ohio $7.30 10.8% 39 44
North Carolina $6.55 11.1% 1 45
Nevada $7.55 11.3% 43 46
California $8.00 11.5% 45 47
South Carolina $6.55 12.1% 1 48
Rhode Island $7.40 12.1% 40 48
Oregon $8.40 12.4% 50 50
Michigan $7.40 14.1% 40 51

A statistical regression of the dataset shows that a $1 increase in minimum wage is correlated with a 1.40 percentage point increase in unemployment. The correlation is significant at the 5% level.

References

  1. 1973 interview with Milton Friedman
  2. Alan Renolds, Cato Institute. Below the Minimum Wage
  3. Bureau of Labor Statistics
  4. Department of Labor

See Also

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