A Living Wage
28 July 2006Once again Congress is making noises about raising the minimum wage. And along with that effort comes much demagoguery. So for the record, let’s discuss for a moment who really works at minimum wages jobs and what a minimum wage really means for low income workers.Democrats would have us believe that America’s poor are forced to try to raise families on minimum wage jobs but is that really true? Actually, it is not.
While there cetainly are people working minimum wage jobs and raising family, they are rarely in minimum wage positions for very long. Minimum wage jobs are entry level jobs. They are primarily reserved for those with little work experience or little experience within a particular industry. Invaribly, workers hired at minimum wage gain experience and move up the pay scale. Exceptions are those who aren’t really interested in work or those who simply cannot keep a job because of a lack of work ethic and/or poor attitude.
And the fact is, most minimum wage jobs are filled by younger workers who are not yet raising a family. Often times they don’t have any financial responsibilities at all. They are learning to work and take on responsibility and the money they earn is almost entirely discretionary. It is simply a myth that the current minimum wage keeps poor people poor.
So how should wages be set? With a few exceptions in the U.S., companies have to compete for employees as much as workers compete for jobs. Again, there are exceptions, primarily in union towns or small communities where a single industry was the center of the economy and it left. But for the most part, companies have to compete for quality employees. And the quality employees have little trouble finding jobs that pay them considerably more than a “living wage,” whatever that is.
So how does one become a quality employee? Most of them started somewhere at minimum wage. They work hard, move up the ladder, improve their skills and work ethic and get ahead. Usually they move beyind the original minimum wage employer and are replaced by other new entrants into the job market. The minimum wage jobs are the training ground for future quality employees.
In a market economy, wages are determined primarily by value unless other factors prevail, such as union contracts or minimum wage laws. The market determines the value of labor which creates a strong incentive for workers to work hard in order to excel in their jobs. This makes them more valuable and they move up the earnings scale while being replace downstream by new entrants.
When a minimum wage is implemented or increased it has an impact on employment. Because value has not changed, something else has to change instead. And that something else usually means fewer employees. After all, companies do not have vast reserves of money to throw at employees. If the cost of hiring a single employee goes up the only option available to employeers is to hirer fewer employees and ask more of them to get the same general output. This means few people get jobs and more of those who do lose them because they are not productive enough to provide the value required for the price.
The result of all this is increased unemployment. And the increase is precisely in the group of people the minimum wage was intended to help.
This is an example of what Thomas Sowell calls “stage one thinking.” Stage one is the initial impact of a plan, in this case, low wage employees earn more money. But at stage two there are fewer low wage employees and more unemployed. This hardly seems a fair trade, either for companies seeking employees or for low wage workers.
There was a time in our history where people worked without pay for the opportunity to learn a skill. In fact, they were not working for free, they were getting paid in the form of skill development and future employability. That is just what minimum wage jobs do, provide for future employability.
The minimum wage is an example of unintended consequenses. The intention is to help the less fortunate among us. The reality is they are harmed more than they are helped. And along with them, our teenage children are also harmed because they will not be hire for jobs when they cannot provide the value necessary to make them worth hiring. So they lose the opportunity, while they can afford to work for less than a “living wage,” to learn how to work. This, in turn, harms their future employability and makes them more likely to join the ranks of the under employeed or unemployeed.
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July 29th, 2006 at 10:05 pm
Couldn’t agree with you more on this topic, Ron. Thomas Sowell and Walter Williams have some of the best writings around on this subject. It really is simple economics and common sense, but I haven’t yet decided whether the Democrats truly believe they are helping the poor, or willfully distorting the facts for an uneducated electorate because they know they can. Probably some of both, I expect.
July 31st, 2006 at 7:33 am
I agree that much of it is intentional as I mentioned above. This relates to my earlier post about demagogues. The issue is not whether wages are fair or not, it is how democrats can gain support.
July 31st, 2006 at 11:12 am
So what’s your solution for the people who fall through the cracks that you mentioned–”union towns or small communities where a single industry was the center of the economy and it left”?
Being from one of those towns, I’d like to know. My aunt works at a Best Western as a house keeper. Her boss takes advantage of her friendship all the time, despite the fact that she’s recently recovered from lymphoma and shouldn’t be working those long hours. My aunt is around 50, and just got out of prison 3 years ago. What should she do?
My other aunt works for an Ethan Allen factory. She’s been there for a long time, but I can’t remember the last time she got a promotion, or even a raise. All I know is she now lives with my parents because she couldn’t scrape enough money together to live in a town where the rent is cheap and still pay for her meds as she has lupus, among other non-self-inflicted health problems. What should she do?
July 31st, 2006 at 1:25 pm
Sarah, the situations you mention, while heart breaking and unfortunate, aren’t really related the problem of a minimum wage. And the fact is, if the minimum wage gets raised to $7.25, the amount Congress is now considering, the situation of your relatives and other like them will be worse, not better. Businesses that are barely holding on will not hold on any longer if their cost of doing business suddenly goes up drastically.
This is another case of what economist Thomas Sowell calls first stage thinking. Yes, at first glance it appears raising the minimum wage would benefit lower income people. But the reality is, it will cause more of them to be unemployed. That has been the case from the introduction of a minimum wage through every increase. Each time, more low income people end up unemployed.
I don’t pretend to have the answers for people like your two aunts. For many the answer is to move to where the jobs are. Some people are unwilling to do that. But they make that choice. As for severe medical situations, that has nothing to do with a minimum wage.
As for your aunt who was in prison, I don’t want to sound heartless but there are real world consequences for making bad choices. I do not see why it should be the responsibility of private employers to take up the slack she created in her life.
The reality is that most people who are stuck in low paying jobs later in life are where they are because of bad choices they made in life. But even then, they can do what it takes to get ahead. If your aunt is stuck in a low paying job in an area where there are few opportunities, she can move. Many others have been in as bad or worse circumstances but chose to do what it took to overcome those circumstances. It can be done if you have the will and determination to do it. But the responsibility is the individual’s, not government’s and not private business’s.
October 6th, 2006 at 9:19 am
[...] Raising the minimum wage is more problematic, as I’ve written before. Hopefully Bush would veto such legislation but there is little reason to suspect he would considering his reluctance to wield the veto pen to date. So, millions of low income families would find themselves as no income families when companies find themselves unable to maintain the same level of employment. Sometimes you just have to see for yourself just how bad an idea really is. If she is successful in raising the minimum wage to $7.25 in one step, the results will be immediate and harsh. [...]