2016 was a big year in terms of the minimum wage discussion. As of this year, nine cities, two states and the District of Columbia have committed to the policy of raising minimum wage to fifteen dollars an hour. Bernie Sanders made minimum wage increase a central part of his policy in his bid for the democratic nomination, and Clinton followed him into a even more liberal policy on the matter as his popularity rose.
At the same time however, some companies, already buckling under the hefty minimum wages in certain cities, have begun to cut down on their labor costs. Take McDonald’s for example, which has begun to to replace its costly labor force with automated cashiers. These actions, and their following effects lead to the question, what is the effect of our minimum wage policy in America? Will it help the poor gain better wages, or will firms just replace and let go of their low wage workers?
Minimum wage policy tends to be one of those highly polarizing issues in politics today, with members of both sides accusing each other of greed, stupidity and a lack of willingness to focus on the facts.
Just a simple Google search on “minimum wage cartoons” can show this to be true. It seems that minimum wage is either the greed of low wage teens who will just put themselves out of jobs by pushing this policy or it is corporate greed suffocating the poor from much needed income just for an extra dollar added onto a million. The reality however, is in my opinion best taken from a research paper done by economists Silvia Mărginean and Alina Ştefania Chenic. Their research challenges the question of whether the policy is good or bad and instead says:
“The big questions about raising minimum wage became more focused on when, where and why.”
Minimum wage, if binding (meaning it actually raises wages), will always in the real world incur inefficiencies. The reality is that interfering with the market’s natural equilibriums will always cause overall one of two things; rises in prices for consumers or loss of jobs for workers. Which of these two will happen ultimately depends on the elasticity of the product sold by the company, which basically means the more customers need or are addicted to the product, the more easily you can raise prices to cover increased worker costs.
In other words, if price isn’t a concern for customers, companies can raise prices without worrying about losing a large number of customers, and can easily shift the cost to consumers. That, or if they cannot lift the price without significant losses, they simply cut down on the workforce.
Either way, one thing we can say about minimum wage is that it is not a Robin Hood law where it takes from the rich to the poor; businesses will simply shift costs to other people. As well, minimum wage policy does not help the economy, but harms it, causing overall dead weight loss, which is the economists way of saying more money could be in more people’s pockets if this policy was not in place. Finally, the last major hamper to minimum wage exist primarily in the US where, as noted by economists Burkhauser, Couch, and Wittenburg who showed that minimum wage workers are primarily teens in affluent families, not poor families.
So what good does minimum wage do? Firstly, it is a means of wealth distribution.
Contrary to what many people may think, economists do not dislike the idea of wealth distribution — in fact, they love the idea. If one man has ten million dollars, another $5 won’t make him more useful or happier, but give that to a man who is starving, and he becomes much more useful to society as a whole. In that line of thought, moving money from an area not needed, to one where it is needed is often considered a good thing.
However, this gets tricky in two areas. The first is where we decide who gets more usefulness and happiness out of money. Some people simply enjoy money and goods more than others; take for example those who decide to work the grueling but high reward hours of wall street, against the example of those with similar degrees who decide instead to work jobs that provide them more home and leisure hours.
Some people can do more for the world with the money they are given than others. Take Bill gates for example, in his garage as a child he was able to start a company that revolutionized the world. While many of our parents may have had access to the same materials he did, they did not start Microsoft. Letting Bill gates hold onto more resources therefore, as a higher producing citizen, is better for everyone as his work expands the economy and the products we have access to.
Secondly, if the main beneficiaries of minimum wage hikes are teenagers in affluent homes as was shown in the economic research of Burkhauser, Couch, and Wittenburg, the shift in income and wealth becomes very inefficient as those teens neither need the income boost to survive, or can greatly boost the economy with it.
The second major use of minimum wage is as a poverty reduction force.
Here, where the equilibrium wage determined by the market still may leave some workers in a place where death is common from malnutrition, diseases whose medicines and vaccines cannot be paid for or where the lack of additional resources can keep individuals stuck in a poverty trap, minimum wage can be used to shoot some people out of poverty, taking the sacrifice of some who lost jobs and the success of the economy overall, in order to secure the future for others. This, however, is considered far more useful in third world countries where the poverty line is something that means the difference between life and death, unlike the United States.
In total, most economists who look at minimum wage in the United States see it as a mostly inefficient form of doing something good. In attempting to help a small number of people who actually need it, the economy is hurt, prices raised and jobs are lost. In addition, most of the beneficiaries don’t even need the help. In truth, taking the money used for minimum wage, and simply handing it out to those in need would be a much more efficient way of doing what minimum wage attempts to do.
Guest Writer: Jake Stauber is a senior Economics major at Wheaton College from Chapel Hill, NC. He is interested in faith, politics, economics and social justice, particularly in instances where all are combined.
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