In an era of divisive politics, the minimum wage is an easy sell. Why not force employers to pay more? They can afford it, or so the saying goes. Raising the minimum wage and sticking it to the “man” makes a great, and simple political soundbite. The minimum wage, however, is a blunt instrument that does little to aid the poor and disenfranchised.
They Can Afford it!
Minimum wage (MW) laws are often discussed in the context of lifting people out of poverty and paying a “living wage.” Lately, though, the MW has become a cudgel in a vindictive form of retribution against “evil” billionaires. Regardless of the motivation, MW laws have complicated effects on the economy.
Forgotten is that many companies operate on razor-thin profit margins. Grocery stores, for example, survive on margins of just 2 percent. They only profit due to sheer volume of product sold. Raising the minimum wage, therefore, can place immense strain on businesses, particularly on smaller businesses that do not move that kind of volume. In a sense, raising the minimum serves the interests of big corporations by eliminating weaker competition.
With such margins, somethings gotta give. Indeed, the classical Econ 101 model would argue that we already have a minimum wage, one that is set by the supply and demand for workers in a market. More employees and lower demand, wages go down, fewer employees and more open jobs, wages go up.
Classical economics also tells us that a price control, like a MW, distorts the market; either prices must rise and/or some minimum wage earners will end up unemployed. The issue is this Econ 101 view is overly simplistic. In many markets, we have a monopsony problem.
The Monopsony Problem
Monopsony is the opposite of a monopoly. Instead of one company controlling the supply of products, in a monopsony one company controls the demand. In this case, the demand for workers. This is common in small towns where there might be one or two dominant employers who control the “market price” of wages. The dominant players can suppress wages below a market equilibrium.
In markets plagued by monopsony, a MW actually corrects for market distortions and is beneficial. This is why research shows that raising the minimum wage may not cause as much unemployment as previously thought, nor does it impact inflation much at all.
Why not then double or triple the minimum wage? Would this move not eliminate poverty, improve livelihoods, with no negative consequences? Of course not, there is never a free lunch.
A national, or even state-level MW law is a blunt instrument that forces a single price control across all industries, employee skill sets, and localities. Doubling the Federal minimum wage overnight, for example, would be economically catastrophic, causing more harm than good.
In 2019, the CBO estimated that a federal minimum wage increase from $7.25 to $15.00 would reduce total employment by about 1.3 million workers and would only reduce poverty by half of a percentage point.
Sure, a modest MW increase might help some people in some circumstances, and is not as economically troublesome as previously thought. But would even a modest MW increase reduce poverty? Not really. The MW doesn’t alleviate poverty because most people in poverty do not work or work too few hours to benefit, while those that do work are at risk of losing their job because of it.
This is all to say that the effects of raising the MW are complicated and their usefulness up for debate. What is clear, however, is that MW laws do not help the poor.
I have previously written how a Negative Income Tax (NIT), a form of UBI that provides an income floor for everyone, might replace most of the existing welfare infrastructure. But a properly designed NIT might also eliminate the need to have an MW altogether.
Unlike the minimum wage, a blunt price control that does little for the poor, an NIT could eliminate poverty. An NIT is targeted in a way that the MW is not. It would also eliminate the welfare traps that keep people in poverty.
Now, an NIT would not be without its own issues. One concern is that the NIT might be “captured” by businesses in the form of reduced wages. But to some degree this already happens with the existing welfare system.
On the flip side, an NIT could actually prop up wages, giving workers more leverage over employers by raising their “reservation wage.” With a stable and predictable amount of cash in hand every month, employees would have more bargaining power without the need for unions. This may offset corporate capture.
While an NIT might be a better way of assisting the poor, it’s not enough to dramatically improve people’s livelihoods. Instead of focusing solely on wages, it would behoove us to examine the cost of living as well. For example, zoning reform can drive down housing costs, and healthcare reform could make healthcare more affordable. Unlocking the full productive spirit of the disenfranchised requires more than political soundbites, it requires confronting the deepest demons and powerful interests in society.
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