The Minimum Wage Debate- part 3

minimumwage

A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy expresses their support for a minimum wage increase. While on the surface, an increase in the minimum wage (or a minimum wage at all) would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cites as to why these two gentlemen support a minimum wage increase. In this second part of the 3-part series, I will address the second point in their article. Note: You can read Part 1 at http://thelion.us/the-minmum-wage-debate-part-1. You can read Part 2 at http://thelion.us/the-minimum-wage-debate-part-2

Their third point is:

Three, it’s the right thing to do. No American working 40 hours or more a week deserves to live in poverty. Republican governors across the country have also stood in the way of progress. Some have pandered to stereotype, suggesting that a raise in the minimum wage should be rejected because it would only help young workers rather than acknowledging that 88% of workers who would be affected by moving the minimum wage to $10.10 an hour are over the age of 20, and more are over the age of 55 than are teenagers.

New Jersey Gov. Chris Christie and New Mexico Gov. Susana Martinez went so far as to veto minimum wage hikes in their states. Wisconsin Gov. Scott Walker mocked the idea, while Florida Gov. Rick Scott described how the proposal makes him “cringe.” Michigan Gov. Rick Snyder, Pennsylvania Gov. Tom Corbett and Maine Gov. Paul LePage all oppose this common-sense change. And of course there is billionaire Bruce Rauner, running in Illinois, who went so far as to suggest slashing minimum wage workers’ salaries by a dollar an hour in order to keep the state “competitive.” They just don’t get it. Just look at Bobby Jindal, former Republican Governors Association chair and current governor of Louisiana, who recently said — in a widely-criticized partisan outburst outside the White House — that raising the minimum wage was equivalent to “waving the white flag of surrender” on the economy. That’s patently absurd. But it’s what the tea party wants to hear. A fair minimum wage was once an issue upon which Republican and Democratic leaders could agree. But now, the Republican Congress and Republican governors have embraced partisanship and right-wing ideology rather than economic growth. And that’s why we are standing with President Obama today to make clear we won’t wait for Republicans to come around — we’re going to give hard-working Americans a raise and we are going to start today.

Since this is the last installment of my rebuttal to this article, I will comment briefly on their third and last point and then make my arguments in favor of low-wage workers, which coincidentally argues against a raised minimum wage, and frankly against any arbitrarily set minimum wage at all. The reason why I will briefly comment on this last point in the article is because there is no substantial argument for the economic viability of minimum wages (raised or otherwise). Their argument is strictly political and quite frankly, unproductive. Who really cares what political party thinks the other political party is doing, contrary to their view on any economic issue, when the debate should be about how these minimum wages will affect the market, businesses and ultimately the job seekers. When it comes to arguing the economic viability of the minimum wage, the productive discussion would leave politics aside and would instead discuss the effects of price, supply and demand on jobs. While ideally, no one working full time should live in poverty, the ideal is never reality. And there are some real, economic reasons why the minimum wage works contrary to the low-skilled, low-wage worker.




First, raising the minimum wage would introduce more people into the pool of potential employees that are in competition to the low-skilled, low wage jobs, increasing the competition for those jobs. When you arbitrarily raise the wages of a low-skilled job, you make that job (which generally requires little training) attractive to a new group of currently employed workers that were making a wage above the previous minimum wage, that would otherwise not be interested in those jobs. For example, let’s say a man is working in a very labor-intensive cabinet shop making $10.10 an hour and would like to work a job that is less strenuous, but paying the same. If you offered him that deal, he’d take 100 times out of 100. Then, let’s say there is a warehouse owner that needs to hire 5 new warehouse workers at minimum wage of $7.25 an hour. He is only offering minimum wage because the work he needs them to do happens to be not so labor intensive, and worth less than, let’s say the labor of the cabinet shop worker. Then, let’s say that the government sees that the minimum wage is not fair and arbitrarily raises the minimum wage to $10.10 an hour. What happens to the man working in the labor-intensive cabinet shop when he finds out about these 5 new jobs that are paying the same that he is making now, but offer a job that is not as strenuous? This is a simple example of how raising the minimum wage can make it harder to some to find jobs, as illustrated in this scenario.

Second, having a minimum wage in the first place works contrary to the benefit of low-skilled workers, exactly opposite of what politicians and other supporters purports that it does. They claim that a minimum wage protects workers from be unfairly under-paid by businesses, an idea that stems from a complete misunderstanding of how free markets work. In a minimum wage scenario, the set minimum wage is really a detriment to the low-skilled workers because it is essentially the government telling employers how much a worker’s labor is worth, instead of the allowing competing individuals in the market determine the worth of his labor. No matter how much value you put in your own labor, your labor is only as valuable as what an employer is willing to pay you for your labor. And that’s easy to understand. For example, if you have a piece of jewelry that has been in your family for decades, handed down from generations past, it probably holds a lot of value to you. And perhaps you find out that it is not actually made of the precious metal that you once thought, but that doesn’t affect the value in your eyes. However, if you go and try to sell it to someone, even though it holds a high value to you, there is a likelihood that you will not get the amount of money. Again, in the minimum wage scenario, the minimum wage is the arbitrary stated worth of your labor, no matter how efficient or how lazy of a worker you are. Let’s face it. The fact of the matter is that there are some people making minimum wage that aren’t worth minimum wage earning (in terms of quality of work). And there are other workers that making minimum wages that are worth more.

In a minimum wage scenario, the government has already pre-determined your worth, and has gone as far as putting a price tag on your labor. In a minimum wage scenario, there is little incentive for employers to increase a worker’s wage higher than minimum. You may get token raises as a good faith rewards, but you will not see large raises, because the employee knows if you refuse to accept the wages in an attempt to leverage for a higher wage, then he can replace you with someone willing to work at the minimum wage. Again, there is little incentive for the employer to pay more than the minimum wage.

Third, and maybe the most import point is that in a minimum wage scenario, workers lose the single most important factor that contributes to any worker’s ability to obtain higher wages. That factor is the leverage of the market. Market competition (both demand and supply) is one of the driving forces for higher wages. When skilled workers (let’s say accountants) who are generally not subject to any artificial, arbitrary wage constraints (like the minimum wage), look for jobs, there is a salary range that is dictated by the market (other employees in the same industry looking for jobs and employers looking for those same potential employees in that industry). If there is a small amount of available employees with the appropriate skills, compared to the number of jobs employers are seeking to hire, then the market rate for employment (wages) will increase. The opposite will be true as well. Low-skilled workers that have wages rules by minimum wage laws do not have the market as leverage to dictate their pay. Now, having the market as leverage doesn’t mean you will be able to earn whatever wage that you think is fair or what you feel your labor is worth, just as accountant cannot dictate the same. But, what is does is it allows the worker who deserves a higher wage (by hard work) the ability (leverage) to find employers willing to pay the wage he is worthy to earn.

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.

Briefs: Incentive

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An important factor in the study of economics is incentive. Incentive is defined as a thing that motivates an someone to perform an specific action. Obviously, there are different types or categories of incentives. Social or moral incentives are built on a persons character, where the motivation is the desire to do what is deemed to be the right thing to do. In economics, incentives are technically referred to as remunerative incentives, where the motivation is for some material benefit, usually money. Some economic incentives include profit, reduced prices, and wages.

An employee’s incentive to work is generally the expectation of a wage or salary. His incentive to work harder at his job or to take on extra responsibility is the expectation of a raise, or some other extra material benefit (perhaps even keeping his job altogether). He wouldn’t accept the proposition of the extra work without the expectation of a extra future benefit. And the employer knows that, also. The incentive for him to even sacrifice other leisure activities to further his education is the expectation of even more future material benefit, usually in the form of money, but maybe in the form of job security or leverage to find another job, if he is let go of his current job. With any economic incentive, there is an expectation of a future benefit (usually material) to the one the incentive applies to. The incentive of a sole business owner to hire a person to manage the finances of the business is the expectation that it will free up some of his time to expand his business or to focus on the current customers to maintain his clients. The incentive of a business owner to hire 40 full-time workers is expectation of the profit that those 40 workers will earn for the business, in one capacity or the other.

Incentive is one of the backbones of free market economics, as opposed to a socialist economic model where incentive is reduced or eliminated and the spiral of inefficiencies and waste rule the day.

Economics is life.

Briefs: Supply and Salaries

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I heard this morning a comment lamenting the fact that NFL quarterbacks get paid so much more than teachers, and how that just does not seem right. Well, that may be true in once sense; maybe our society in fact places too much emphasis on sports than it does education. But, the salary differential is simply the effect of supply and demand. There are very few individuals in the US that can be NFL quarterbacks (meaning the supply is very small). That drives the price (salary) of the NFL quarterback up very high, when compared to a teacher. And we know that the demand for a good quarterback in the NFL is very high (our society’s emphasis on sports). Conversely, there are millions of individuals in the US that can be teachers (meaning the supply is very high). That drives the price (salary) of a teacher down, when compared to an NFL quarterback.

Economics is life.