by Henry Mann
Politicians dispute it, economists scrutinize it, workers embrace it, and employers disdain it. As in the past, the age-old debate over the minimum wage is proceeding currently at both the state and federal levels.
Minimum wage laws, which set legal minimums or floors that indicate the hourly wages paid to certain groups of workers, were first introduced in Australia and New Zealand as a means to guarantee a standard of living for unskilled laborers.
Also, certain elements of capitalism, including the wages that workers are paid, require regulation. History has proven that the owners of capital take advantage of workers, without regulation.
The common train of thought among the general public is that setting a legal minimum wage not only prevents worker exploitation but also reduces poverty as it raises the standard of living of the worker.
Since minimum wage does not fully cover, in many cases, the basic necessities of life, many people that survive on minimum wage spend all, if not virtually all, of their earned wages. Such workers could potentially benefit greatly from an increase in earnings brought home each week.
Furthermore, increasing the wage to $10 an hour, which is currently being advocated at the federal level by President Obama, would inject $60 billion dollars into the economy over two years. The increased purchasing power of the minimum wage workers may, in turn, aid in stimulating the economy.
However, most economists, regardless of their political leanings, agree that despite the common intuition of the public, minimum wage laws tend to result in hardship for the very workers that they were designed to serve.
Why? Simple: Though the minimum wage laws can regulate the wages paid to workers, they cannot create jobs nor guarantee the stability of employment.
Economics are subject to the laws of human nature; in this case, the law of elasticity dictates that there is a direct relationship between wage levels and employment. As minimum wage levels increase, employment decreases—all other factors being equal.
As stated by David Neumark, a professor of economics at the University of California, Irvine, and William Wascher, an economist for the Federal Reserve, “Minimum wages reduce employment opportunities for less-skilled workers.”
According to the laws of economics, an employer is generally unwilling and unable to pay a worker more than the product that he produces. Thus, if the minimum wage law sets an hourly wage that is too high for small business owners to comply with for all of his workers, then they may be forced to let a number of employees loose.
The current push to increase the minimum wage is based upon the ideal that wage levels should be established in order to support more than one person. Unfortunately, most entry-level jobs do not require high enough skills to support a wage that is high enough to support more than one person.
Research published in 2010 by economists Joseph Sabia and Richard Burkhauser concluded that if the federal minimum wage were increased from $7.25 an hour to $9.50 an hour, only 11.3% of workers who would gain from the increase belong to households living in poverty.
While laws can be put into place that require firms to pay workers a standard wage, the reality illustrates that capital travels where it can most efficiently be deployed. Artificially high minimum wages force firms to use capital inefficiently. When minimum wages are too high, firms hire fewer entry level workers, leading to unemployment especially among youth.
Thus, the real debate does not center on whether or not society is willing to raise the minimum wage and accept the consequences that may result, namely potential unemployment among unskilled workers and young people.
Rather, the true discussion should revolve around whether or not raising the minimum wage by a few dollars an hour will truly boost the economy in the long-run: Will the number of individuals living in poverty decline? Will America’s high unemployment rate diminish? Will the ominous gap between the rich and the poor lessen?