Sunday, August 21, 2011

What about the minimum wage?

Nothing says "I'm a cold-hearted capitalist" like saying the minimum wage should be abolished.

...But it really should.

There is a simple, sound economic argument against the minimum wage, and those who reject the argument, no matter how intelligent they might be, are really being quite irrational. That is because we let our instincts get the best of us. We ask ourselves, isn't a worker better off if he is paid enough to live on? The answer to this question is obviously "yes." But that isn't the question. The question is, how does a higher wage for some workers affect others?

The clear, irrefutable wisdom of the economists is this: a minimum wage will cause overall low-wage employment to go down. This hurts unskilled workers--not the workers who actually are working, mind you, but only the workers who can't find work because it isn't available to them.

The video below is from Milton Friedman's "Free to Choose" series (the link is here), and it is primarily about labor unions, but it also features a vigorous debate (second half of the video) about the minimum wage:

As Walter Williams points out in the video, the minimum wage law is really a law that says, "If you are unable to produce labor worth $X an hour, you are not allowed to work." It is difficult for the average person to see a minimum wage law as a violation of workers' rights, but in fact it is. It is, unfortunately, a belief in the mythical power of words that leads us to think that declaring a minimum wage actually improves the lot of poor people. As Milton Friedman points out, why wouldn't we just declare the minimum wage to be $200 an hour?

However, before you conclude that I really am, after all, a cold-hearted capitalist, consider my alternative. Instead of a minimum wage, why not simply subsidize wages using a moderate wealth redistribution plan? If the wages of a laborer really are too low to be considered living wages, the best plan is to subsidize those laborers until they can find better work.

Under this plan, instead of a minimum wage, there would be a "target wage." If workers happened to have wages below the target wage, the government would pay a certain proportion of the difference. For instance, the federal minimum wage is currently $7.25 an hour. We would need to make the target wage a little higher for my scheme to work, so let's make the target wage about $10 an hour, and have the government pay 50% of the difference between a person's actual wage and this target wage. So if a person got hired at, say, $4 an hour, he would in fact be paid $7 an hour once the subsidy is included. Even a person whose wages were desperately low would still get at least $5 an hour with the subsidy.

This scheme would mean two things: (1) workers would probably have more opportunities to find a job, any job, and begin acquiring skills, and (2) workers would have greater freedom to choose between employers based on factors other than wages--perhaps someone would rather start working at a small business for lower wages than work at Wal-Mart. There is a third benefit which goes to us as a society: the taxpayers would be subsidizing productivity. Given that you usually get more of anything you subsidize, isn't it a positive thing to subsidize employment rather than unemployment?

Overall, this plan would be moderately progressive, taking a little bit from the rich to give to the poor; but it would also be a little more consistent with Econ 101 and with the principle of freedom of contract between employer and employee.

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