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A Case Against The Minimum Wage

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A Case Against The Minimum Wage Essay, Research Paper

It sounds like very good news for the low-income workers and their families whenever the government increases the minimum wages. On the surface minimum wage laws seem like the best prescription to treat poverty and improve living standards of the working poor. Promoters of minimum wage laws are taking positions that such laws alleviate poverty and improve the conditions of life of the working poor. However, upon closer analytical examination, it can be seen that such laws have perverse effects. Opponents are concerned about costs of statutory wage minimums in terms of the hardships they impose on other workers, employers, and regions as well.

The United States Congress adopted the Fair Labor Standards Act in 1938. Congress created the minimum wage toward the end of the Depression era to ensure a “minimum standard of living necessary for health, efficiency and general well-being for workers.” (Fair Labor Standard Act, 1938) In 1993 some 4.8 million people worked for minimum wage or less. (Mishel, Bernstein & Rasell Table 7) According to the Department of Labor, nearly 6.45 percent of the labor force is earning minimum wages. (Tannenbaum and Gupta B1) By having minimum wage laws the government is trying to ensure that everyone has a better standard of living and a more equal chance of competing with the higher income families and a fairer chance to improve their economic condition.

In talking about low-income families the topic of equal rights arises and what an individual can do to get fair treatment regardless of their income. In 1962, President John F. Kennedy enacted the Kennedy rights, and among them is the right to be a minority consumer without a disadvantage. The word minority not only refers minorities but also to low-income consumers. What this law means is that a consumer regardless of their income has the right to safety, which is knowing if a product is hazardous to their health. The right to be protected against false advertising, the right to have products and services at competitive prices, and the right to be heard.

These rights have often been bent when it comes to low-income minority consumers. Often times minorities are exposed to unsafe products, have less access to information, have fewer choices of brand alternatives, and have less access to means of redress. There are many reasons for these problems. One reason is that low-income individuals do not have the time or money to find more information and pick from different brand alternatives. Having less choice of brand alternatives minority-group consumers tend to be more brand loyal because there is more of a financial risk in choosing a different brand. Many times brand loyal consumers will also be store loyal.

There are a couple reasons why low-income consumers also tend to be store loyal. One reason is to reduce the risk of shopping in an unfamiliar store. Studies have found that store loyal customers tend to have a lower income and be less educated. Often times these consumers do not have the chance to shop much because of lack of time or lack of transportation. A question now arises as to if and how the government should help these consumers. Should the government play a role in increase price and brand awareness and possibly even transportation for low-income consumers or should the government raise the minimum wage?

The reason that raising the minimum wage does not ensure that low-income consumers will not be at a disadvantage is shown by the graph.

As you can see that at the equilibrium point of $4.25 all participants in the market are doing as well as they can, given the condition in the labor market. (Goodman & Dolan 171) If minimum wage is raised to $5.50 unemployment will grow. The reason for this is that the supply exceeds the demand. The equilibrium point does not change because of the legal requirements and the net effect is unemployment and/or less work for the workers. Just as a worker will only offer his labor time for a wage he finds beneficial, so an employer will only be willing to pay workers a wage that permits him to earn a profit. The higher the wage, the fewer workers the employer will employ. This is what economists mean when they invoke the law of supply and demand. Low-wage workers are most affected by these laws. Some workers will gain from the wage increase through higher income, however these gains come at the expense of other workers. Groups with the lowest levels of productivity suffer the greatest loss. Low-wage workers will be forced into second-best employment or into unemployment which often include the teens, minorities, elderly, handicapped, and those without skills.

In the early 1940’s, the teenage unemployment rate was not much higher than the unemployment rate for adults. However, as the teenage population grew, the unemployment rate grew with it. “By 1960, when the minimum wage was $1.00, the teenage unemployment rate was two and a half times the rate for all workers. By 1977, when the minimum wage had reached $2.30, the teenage rate climbed to over three times the rate for all workers.” (Goodman & Dolan 170)

The preponderance of evidence indicates that the problem for black teenagers has become even worse. In the early 1940’s, black teenagers seemed to have few problems finding work. The jobless rate for the black youths was less than that of white teenagers but by 1949 things had altered. The jobless rate for the black youths was 2.8 times the national rate. By 1971, that rate was 3.2 percent and by 1977 the rate for blacks youths had reached 40 percent. (Goodman & Dolan 171) President Lyndon Johnson stated, “The question is not whether the minimum wage should be increased but when and by how much.” (Cullen 32) In a survey that was conducted of 19 and 20 year olds at Ohio University, 60% of the students said the minimum wage should not be raised. The reasons that were given against raising the minimum wage is that it increases inflation and more money is paid for taxes. The 40% that said minimum wage should be increased gave the reason that it helps the low-income families that are on welfare get off of welfare. (Survey)

The loss of teenage jobs has been estimated at 11 percent. ( Renolds A14) In a study of dozens of federal and state minimum wage hikes since the 1970’s, David Neumark of Michigan State University found that total employment consistently dropped by one to two percent for every 10 percent rise in the minimum wage. (McNamee 36) Consider an analysis done of data from 1979 to 1992 by David Neumark of Michigan State and William Wascher of the Federal Reserve Board found that President Clintons’s proposed minimum wage hike will put 120,000 16 to 19 year old teens out of work and school. (Aley 48) The higher minimum wage cajoles teenagers into the labor force who would otherwise have stayed in school. Higher minimum wages tempt high school students to sacrifice education and future higher income by dropping out and taking jobs. The new workers entering the market due to the hike, push aside less educated working teens who end up with neither schooling nor jobs. (Entin A16)

The median income of African-American households is less than two-thirds that of whites and one reason is that African-Americans have less education. Only 13 percent of African-American adults have college degrees in 1995, compared to 24 percent of whites; and 74 percent had high school degrees, compared to 83 percent for whites.(Textbook) The lack of income and education has led African-Americans to spend more of their money on necessities such as cosmetics and toiletries, while whites spend more on medical care and entertainment.

Hispanics also spend more of their money on necessities because they also are less educated and have lower incomes. Their median income is about two-thirds that of the average American and their educational levels are well below average.(Textbook) However Hispanic Americans are highly brand loyal. One survey found that 62 percent of Hispanics buy the same food, beverage, and household items on a regular basis. A reason for this is that minority consumers in lower socioeconomic groups are often at a disadvantage when it comes to adequate brand alternatives, fair prices, and the assurance of product safety. (Textbook) Hispanics along with being brand loyal have a tendency to believe that advertising is honest and portrays information and products honestly. This is why there are laws that the Federal Trade Commission (FTC) has established protecting consumers from false advertising. In order to help alleviate these problems should the government raise the minimum wage so that consumers can purchase more and seek more alternatives. When minimum wages are raised business must compensate for the extra expenses incurred with the raise. Some businesses may reduce their work force to save money or they may charge the consumer more.

The argument of advocates of the minimum wage floor that the firm can pass the costs occurred by the wage hike to its customers is not a valid one. Robert Shapiro, lead economist at the Progressive Policy Institute says that about 80 percent of the costs of an increase in the minimum wage are passed on in the form of higher prices. A survey of small businesses found that after a wage increase 28 percent raised prices, 26 percent postponed expansion plans, 14 percent terminated at least one employee, and 9 percent did two of the preceding. Many firms have also turned to automation to reduce the threat of wage increases. (Horwitz A4)

The minimum wage laws do not alleviate low-wage and unskilled workers from poverty. They serve a purpose of keeping the poor people poor. The minimum wage laws make unskilled workers handicap forever by taking the element of incentive away from them. One’s labor is the most valuable property one has to sell. Variance in wages and earnings among workers at different levels of skill provide and incentive system of investment in skill acquisition. Different occupations have different wages. An interview with a small business owner in Cleveland revealed an interesting point. The owner stated that he would rather employ one skilled worker that can do the job in one day than hire three unskilled workers that can do the job in one day. The reasoning behind this is that one skilled worker requires less monitoring than the unskilled workers. The extra money paid to the skilled worker is worth the time of training and monitoring the unskilled workers.(Interview) If minimum wages compress that spread and cause the differences between the wage rates in unskilled and skilled occupations to be too small, the average quality of the labor force is diminished, output is lower, and poverty tends to be intensified. The lower class makes up 16 percent of the population and represents the unskilled, poorly educated, and socially disadvantaged. This diagram shows that the poor in America are getting poorer while the rich are getting richer.

Average Income Average Income Percentage Change

1970 1993 1970-1993

Top 5% by income $87,018 $120,043 +40%

Bottom 20% by income $18,301 $17,940 -2.0%

A raise in minimum wages does not insure that low-income consumers will not be at a disadvantage. If minimum wage is raised then people are put out of work in the process of downsizing or replaced by more efficient machines. A few do make more money but that extra money is also taxed and businesses will have less capital to expand and hire more workers. Without the minimum wage raises businesses will expand because they have more capital. Along with this expansion businesses will hire more people and create more jobs, thus putting more money into the economy, which will reduce inflation and keep prices on items relatively low. If businesses can not expand and can not afford to fire people then the businesses will raise their prices. The raised prices will hurt people working for minimum wage. Therefore when minimum wages are raised all the price of goods are going up so the consumer maybe making more money but is also paying more money for goods. Simply, the minimum wage floor is not a way to help the poor Americans.

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