Early minimum wage laws, first legislated in New Zealand, were designed to provide the industrial workforce with a degree of economic protection. The law was well received and, by the end of the twentieth century, a majority of countries had some form of legally mandated base wage. One hundred and twenty-three years later though, minimum wage laws continue to ignite heated debate among economists and the general public.
Consensus is hard to find on the question of how high the minimum wage should be, or whether it should even exist in the first place. Economists – and there are many who do care about workers, I assure you – tend to lean against the idea.
Those who support a higher minimum wage argue it is an effective measure with which to improve the plight of the growing ranks of the working poor. Many demand that a “living wage” – a wage high enough to maintain a normal standard of living – be instituted. They claim a living wage is the only way to ensure well-being for workers in a labour market where many struggle to find higher paying jobs.
Opposed are those who assert that lifting the minimum wage would have calamitous consequences for the economy. They are concerned that such a measure would squeeze small businesses and put large numbers of people out of work. Such fears may be somewhat exaggerated. In the US, the minimum wage is set at US$7.25, or 37 per cent of the median wage. There is some empirical evidence to suggest that beneath a certain threshold, often suggested to be 50 per cent of the median wage, increasing the minimum wage does not significantly impact employment rates.
However, the living wage often cited by activists is US$15 an hour, 77 per cent of the median wage in America. Supporters claim that the impact upon businesses’ costs will be offset by higher employee productivity and reduced turnover. To a certain extent, these are logical arguments. Yet, it is unlikely that the effect of such a high minimum wage will be counteracted by productivity gains.
Those who champion such a high minimum wage undoubtedly have the best interests of workers in mind, but their reasoning runs counter to fundamental economic concepts. A minimum wage essentially acts as a “price floor”, the lowest price a producer – in this case a worker – can receive for supplying a particular good or service. When a minimum wage is set in the labour market, there is a greater supply of workers than there is demand. Thus, unemployment occurs.
This argument maintains that although a higher hourly rate may improve the welfare of some workers, many others will find themselves out of a job. In Milton Friedman’s words, the minimum wage is a requirement that “employers must discriminate against people who have low skills”, because the least able workers – often ones that need the job most – will be the first to go. These workers may become stuck in the rut of long-term unemployment, unable to find a foothold in the job market.
Additionally, there are very real concerns that a higher minimum wage could accelerate the shift toward automation, particularly in the fast food industry. This would eventually put far more people out of work and, although some workers may be able to find other industries to work in, it is highly likely that some jobs will be lost permanently.
In the heated debate between those who clamour for a “living wage” and those who warn of mass unemployment, the underlying issue is sometimes lost. There is as yet no definitive conclusion regarding the effect of a higher minimum wage; however, proponents of a higher minimum wage ultimately strive to relieve workers from the burden of poverty. Therefore, the question that should be is asked is not whether a raise in the minimum wage is in itself “good”, but rather if it is the most efficient way to improve worker welfare. The answer to that question is perhaps no.
At some point, someone must pay for the minimum wage. If companies don’t absorb the costs and become less profitable, they will pass those costs onto their consumers. Naturally, these higher prices will disproportionately fall on those in the lower and middle classes, for whom the price increases will constitute a relatively larger share of income. The non-partisan Congressional Budget Office estimates that only one-fifth of the monetary benefit of a higher minimum wage goes to those beneath the poverty line. Other, more direct government subsidies to workers could be more effective.
It is a fact that income inequality and poverty are among today’s most pressing problems. It is also true that a greater minimum wage would, in some countries, do more good than harm. But it would be unwise to proceed with great fervour toward higher rates without considering valid alternatives and potential economic ramifications. Ultimately, the welfare of millions is at stake.