Right to the Point11/6/08

Nov. 6, 2008

 

A closer look at minimum wage legislation

By Mike Benevento

This week’s column will examine minimum wage legislation and its effect on the working class it is designed to help.

On the surface, establishing a minimum wage sounds like a good idea. Americans want to eradicate poverty and want low-wage workers to make a decent living. Minimum wage laws are seen as important tools in achieving these aims.

However, most economists do not favor minimum wage legislation. According to Linda Gorman (a senior fellow at the Independence Institute), a consensus of economists oppose minimum wage mandates: “Most economists believe that minimum wage laws cause unnecessary hardship for the very people they are supposed to help.” Given the difference between what most Americans and economists believe, there must be more to the minimum wage than meets the eye.

Because so many economists are against the minimum wage, it’s time to look closer at the issue. Overall, I am not advocating for or against the minimum wage. I agree with many claims from both sides. So, in this column, I simply aim to present some of the arguments for and against the minimum wage that Americans may not have considered.

Supporters claim the minimum wage increases the poorest workers’ standard of living and earning power. The wage also protects these workers from employer exploitation. Since businesses pay for it, implementing the wage does not burden the government. In fact, because the poorest workers earn more, it reduces the government’s welfare costs.

In contrast, opponents claim the minimum wage hurts business by reducing profit margins. In order to compensate, businesses will either raise their prices or hire fewer people. Thus, the wage reduces economic growth and increases unemployment and outsourcing.

Let’s face it — the picture most Americans have of people earning the minimum wage is that of adults raising impoverished families, struggling to get by. For these families, the minimum wage often is all that keeps them from living on the streets.

However, that perception may be far from reality. According to the U.S. Bureau of Labor Statistics, only 5.3 percent of minimum wage earners are from households below the official poverty line.

Further, minimum wage earners tend to be young and single. Teenagers dominate the low-skilled worker category because they often lack the education, experience and maturity to earn higher paying jobs. Only about 2 percent of workers over 25 years old earn minimum wages.

Walter E. Williams, a distinguished professor of economics at George Mason University, points out that poor people are not poor because of low wages. He states that most are poor because of low productivity, and wages are connected to productivity.

For the most part, in a free market economy, wages are related to a worker’s productivity. More productive workers are worth more to a business and thus they usually earn more money. While Congress can legislate higher wages for people, it can’t legislate that these people are more productive.

He gives this example: If a worker can only produce $6 worth of productivity per hour, and Congress legislates that he must be paid $8 an hour, then it’s a losing proposition for employers to pay $8 an hour to someone that can only produce $6 worth of value. Thus, employers will in effect discriminate against low-skilled workers by seeking out those with better skills, capable of delivering $8 worth of productivity per hour.

Williams is not alone in this belief. The American Economic Review reported that 80 to 90 percent of economists surveyed agreed that increasing the minimum wage causes unemployment among young and low-skilled workers.

As the CATO Institute notes, “Minimum-wage legislation, by its very nature, benefits some at the expense of the least experienced, least productive and poorest workers.” The minimum wage hurts the least employable by making them unemployable, in effect pricing them out of the market.

An alternative to the minimum wage is an earned income tax credit (negative income tax). In an Employment Policies Institute survey of economists, an overwhelming majority favored the earned income tax credit over the minimum wage or welfare as best helping poor families. This tax credit would benefit a broader low-skilled worker population, would not cause unemployment and would distribute the cost widely rather than concentrating it on employers of low-wage workers.

Finally, as Williams suggests, “Those of us who truly care about the welfare of low-skilled workers should focus our energies on helping them to become more productive, and a good start would be to do something about the rotten education that many receive.”

Michael Benevento is a former Air Force fighter jet weapon systems officer. He has a bachelor’s degree in Military History and a master’s in International Relations. Mike resides in Williston with his wife Kristine and their two sons, Matthew and Calvin.