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The minimum wage…it doesn't make cents

By Gregg Coughlin
web posted November 30, 2009

No one likes poverty. It doesn't help economies, it decreases economic growth, and it hurts a nation's overall productive capacity and GDP. Many solutions have been presented to deal with poverty and stimulate economic growth, among them redistribution of wealth, increased spending on welfare, and "trickle down" economics (to name a few). Yet some people claim an increase in the minimum wage will decrease the poverty. Because of its seemingly compassionate mindset, increasing the minimum wage seems like an alright idea if one wants to gain political votes. Although it may appear politically attractive, the unintended consequences of a minimum wage increase are enough for any policy maker to steer clear of this lousy economic principle. While this mode of thinking was largely disproved during the 90s, some people still hold this errant view today. Beth Shulman, a lawyer in the D.C. area, argues in her book The Betrayal of Work that the low minimum wage keeps 30 million Americans in poverty. Her solution is naturally an increase in the minimum wage. Though her motives may be pure, her method is lousy and reap terrible consequences. Increasing the minimum wage will not have positive effects because it results in job loss and fails to help those in poverty because most of them either a) don't receive the minimum wage, or b) they don't work at all.

First of all, high minimum wages decrease the hiring power of companies and firms, reducing the total amount of labor they can employ. According to the Heritage Foundation, the argument for an increased minimum wage is "If businesses must pay their low-wage employees more, then those workers should earn more and fewer of them should live in poverty. Common sense says a higher minimum wage should fight poverty." But as we all learned from the last chapter, this just isn't so. Businesses simply can't hire more workers if they have to pay them more without an increase in price. If minimum wage goes up, firms simply cannot hire as many workers, because cost of production rises without an increase in output. Thus an increase in the minimum wage would entail businesses laying-off numerous employees. In the real world, it's always better to have a job, no matter how low paying, than to be out of work.

Increased minimum wages cause job loss, and as a result more people fall below or near the poverty line. Economists David Neumark of the University of California–Irvine, Mark Schweitzer of the Federal Reserve Bank of Cleveland, and Will­iam Wascher of the Federal Reserve Board did a study showing the effects of increased minimum wages. Their results show that minimum wage increases hurt the poor:

"The answer we obtain to the question of whether minimum wage increases reduce the proportion of poor and low-income fam­ilies is a fairly resounding "no." The evidence on both family income distributions and changes in incomes experienced by families indicates that minimum wages raise the in­comes of some poor families, but that their net effect is to increase the portion of families that are poor and near-poor. Workers who initially earn near the mini­mum wage experience wage gains. But their hours and employment decline, and the combined effect of these changes on earned income suggests net adverse consequences for low-wage workers."

In addition, another thing we learned in the past chapter is that wage decreases actually are beneficial to everyone in the long run. When wages go down, more people can be hired. This increases productivity, which leads to increased sales as companies can basically make more for less. As a result, the companies undergo tremendous growth, leading to higher wages and more jobs in the long run.

Second, a minimum wage increase wouldn't necessarily impact those living poverty because many people living in poverty don't actually receive the minimum wage. While I would agree with Shulman that an increased minimum wage does increase the wages of some (those who work at minimum wage), overall wages for most of the poor remain largely unaffected. Why? Well, for starters, more than half those who work for minimum wage aren't poor. The Heritage Foundation reports "that the vast majority of minimum-wage workers do not live in poverty." In fact, "A majority of minimum-wage earners are between the ages of 16 and 24, and over three-fifths of minimum-wage earners work part-time. The average family income of a minimum-wage earner is almost $50,000, and less than one in five live at or below the poverty line." Thus we can see that the many of those who earn the minimum wage aren't actually that poor and thus aren't in dire need of an increase in wages (although I personally wouldn't mind a raise now and then).

After reading that stat, you may be thinking to yourself, "Now, wait a second. If increasing the minimum wage causes job loss, and yet many of those earning the minimum wage don't really "need" the money because they're not living in poverty, wouldn't it make sense to raise the minimum wage and just make sure those who are laid-off are those who don't "need" the money (students and such)?" This presents us with a dilemma and is a decent argument for the minimum wage.

Yet there are a few flaws with this way of thinking. First, the point of that is just to say that increasing the minimum wage won't necessarily have an enormous effect on the poor, because many of those earning the minimum wage aren't living below the poverty line. Second, just because someone doesn't need the money to live above the poverty line doesn't mean they should be restricted of their right to have the opportunity to earn money at all. Everyone should have the freedom to work if they want to, and no one should ever be restricted from working due to government policies. Third, and most importantly, the minimum wage hurts the poor because it decreases productivity. If you think about it, the minimum wage forces companies to pay higher wages for less labor, decreasing productivity. This in turn causes prices to rise, which hurts consumers. And if the company doesn't sell enough due to high prices, workers are hurt as well, resulting in more lay-offs. So no matter who is working, whether teenager or a father trying to bring home the bacon, more workers mean more productivity, which can only mean goods things.

Finally, increasing the minimum wage does not solve for poverty because most of those living in poverty are there for a good reason: they simply don't work. As the latest data shows (see graph below), 63% of those living below the poverty line don't work. Raising the minimum does nothing for them because they aren't currently employed. In fact, raising the minimum wage would actually hurt those who aren't currently working because it would result in less available jobs, thus decreasing their chances of finding a job.

As you can see, raising the minimum wage has dire effects on the economy. It decreases productivity, reduces jobs, and overall does nothing to answer the problem it purports to solve. Rather than reducing poverty, it actually increases it. While some politicians may have good intentions by wanting to increase the minimum wage, the fact is, increased wages only help a small portion of those in need, while leaving the rest of without a job. It's really a choice between some people receiving an increase in wages, with others taking a huge cut in pay (a 100% cut, to be precise). Where I live, minimum wage is $8 an hour. For me personally, I'd love to see the minimum wage go up. It'd be great to earn $10 an hour to scoop ice cream…it's harder than it looks. But after thinking about, it doesn't really make sense for me to want an increase in the minimum wage. If it does happen, I might find myself out of a job. I'd rather make $8 an hour than no dollars at all. I don't know what Shulman thinks, but it makes cents to me. ESR

Gregg Coughlin wrote this essay for his Pennsylvania Homeschoolers AP Economics Class. He plans on double-majoring in Business and some type of Pre-Law. He is currently happily employed scooping ice cream for $8 an hour and would have it no other way. He dislikes government intervention with his wages and dislikes third person bios even more.

 

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