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The Minimum Wage Debate

by Jason Dean 


The federal minimum wage recently went up from $5.15 an hour to $5.80 an hour. That’s still too low a wage for most people to live on, as is the $7.25 it will be boosted to by 2009. It’s unfortunate that anyone has to earn less than $13,000 a year ($5.80 * 40 * 52 = $12,064), but does the federal minimum wage help, or does it just make matters worse?

I have been engaging in a friendly debate with Patrick of Cash Money Life (A Personal Finance Blog with a Salute to the Military). He supports the new minimum wage, while I do not. It’s not that I don’t want people to get raises — I do! In fact, I used to be a supporter of the minimum wage increase. Here is a letter to the editor I wrote in early 2006:

In 1968 the minimum wage was just $1.60 per hour and few businesses had a problem paying such a paltry wage. But if that $1.60 were indexed to inflation, the minimum wage would now be $9.12 per hour, according to the nonpartisan Bureau of Labor Statistics (BLS).

In 1997 the minimum wage was raised to $5.15, where it has remained for the past nine years. In the 25 years since 1981, the minimum wage has only been raised four times. Comparatively, it was raised at least 11 times in the prior 20 years beginning in 1961. In fact, the $5.15 minimum wage has lost nearly 20% of its buying power since 1997, representing a “real wage” of just $4.17 according to the BLS.

Opponents of the minimum wage say that an increase would lead companies to offshore even more jobs, or that it would be crippling for small businesses. In reality, most minimum wage jobs cannot possibly be offshored, since they are in the service sector. We cannot outsource our janitors, maids, and food service workers any more easily than we can download a sweater on the internet. As for small businesses, a two-year exemption from any minimum wage increase could be extended to all businesses with ten or fewer employees.

In short time, enhancing the discretionary spending capabilities of America’s working poor would do nothing but benefit all businesses, as these families would pump any wage increases back into the economy. Even Wal-Mart, long the beneficiary of a failing economy that pulled people down from the middle class and into its core demographic, now supports a minimum wage increase. At last, even everyday low prices are not low enough for the everyday low wages of so many million Americans.

Many citizens are unaware that the minimum wage is as low as it is. To them, it is unconscionable that a mother could work 40 hours a week and take home less than $200 after taxes. We do have a welfare system in this country, and it isn’t going away anytime soon. With that in mind, how can we ask a parent on welfare to take a pay cut to enter the workforce?

So clearly, I understand the arguments in favor of a higher minimum wage. But in the time since I wrote that letter, I’ve come to better understand the arguments against it. It’s not mean-spiritedness against low-wage earners, but an appreciation for the laws of economics. It basically boils down to this: If there is an unemployed person who is willing to take a job for $5 an hour, and there is a business owner who has a job for which he can only afford to pay $5 an hour, why should the government make it illegal for them to come to their own terms of employment?

Minimum wage proponents certainly have their hearts in the right place. But they have to consider that the money for the raises given to minimum-wage workers is not created out of thin air — it has to come out of a company’s revenues. Sure, Wal-Mart might be able to cover an extra $0.65 an hour, but what about Square Deal’s Outlet, my parents’ store in impoverished Hudson, MI? It’s not as easy for them. And even in Wal-Mart’s case, the higher wages are going to result in one of two things: 1) Higher prices for its millions of low-income consumers, effectively negating the positive impact of a wage increase, or 2) Lower profits for the company — and thus lower returns for its millions of shareholders, who hold Wal-Mart stock in their IRAs and 401(k)s, or count on Wal-Mart dividends for retirement income. This is not as simple of an issue as taking from the rich and giving to the poor.

The final word is: Readers need to make sure they have the skill set that allows them to compete for higher wages, or better yet, to be wage payers instead of wage earners. In our globally interconnected economy, old notions of wage and price controls are flying by the wayside, and in their absence, we are experiencing unprecedented economic growth. This growth is not being distributed evenly, so it is each individual’s first responsibility to make sure that he/she takes advantage of the opportunities afforded to him/her in the New Economy. Government may have a role to play in helping those left behind, but first and foremost is personal responsibility.

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Comments

7 Responses to “The Minimum Wage Debate”

  1. Cash Money Life - A Personal Finance Blog with a Salute to the Military » This Week in Review - My Favorite Personal Finance Posts on August 5th, 2007 1:57 pm

    [...] Money Daily – The Minimum Wage Debate. Jason and I have a friendly debate over the Federal Minimum Wage and this is his latest response. [...]

  2. Eric on August 5th, 2007 9:27 pm

    It’s unfortunate that increasing numbers of Americans are buying into the big, bad and evil corporation idea. I love the example about your family’s store. Small businesses in America by far employ more people than any single corporation (including wal-mart). For these business operating at the margin, where an extra $.70 to each employee could push them over the edge, an increase in wages could be the last straw. Precious few options are available. They could increase prices but risk losing customers; or lay off thier least productive worker. Is the benefit to the 9 other workers who keep thier jobs greater than the loss of the one who lost his/her job?
    Since our education system teaches us only to be employees, people fail to see this kind of legislation from the owners’ side. I often hear people complain that they don’t get paid enough, yet they do nothing about improving thier skills or situation. For me, they don’t deserve in the greater rewards of the company like the owners do. It’s a simple risk and reward structure. The owners accept ALL the risk, often by mortgaging thier own property; where as, the employees will only lose their job if the company fails.
    At the place I work, the only person who got a raise last week (or two) was the high school girl who still lives at home and already has EVERYTHING. I don’t have anyone but me to pay for college. It’s never based on who needs it more. Thankfully, I’m not poor. There are certainly people who need it more than me.
    I’m glad I’m not the only one out here opposed to the entire minimum wage idea.

  3. Jason Dean on August 5th, 2007 10:37 pm

    Eric: Thank you for the comment and for adding SMD to your blogroll. I will be checking your site regularly.

    First, yes, a corporation is incapable of being “evil.” Only the people who work at, manage, or control the corporation can perform “evil” acts, but if they do not initiate force or commit fraud, then I don’t see how it is possible for them to do anything evil, and if they DO initiate force or committ fraud, this is where the government has a legitimate role in stepping in and dealing with those individuals, and potentially, the coproration itself.

    I agree with virtually everything you said, however, I think we need to draw a fine line between attacking the idea of govenment-set wages and attacking the people who earn them and want raises. I understand that you were attacking the former and not the latter, but I think it’s important to note that many of the people whom you admonish for not building their skills (which they should!) are creatures of the system. Yes, they have to accept personal responsibility, and yes, the people who rise above the current system are to be praised, but the fact is, in my opinion, everyone’s wages would be higher if not for all the intrusion of politicians into the marketplace.

    My take: Individually; build your skills and maximize your utility. Politically; agitate for less political intereference, but advocate for STRONG penalties against those corporations and businesses that DO initiate force or commit fraud. Even take Wal-Mart for example — they had their share of legitimate abuses. Now you could say that any company that size is bound to have its share of problems, which is true, but since they got cracked down on, they’ve implemented new internal controls to stop individual store managers, etc., from abusing employees. I know because my sister-in-law works at Wal-Mart.

    Thanks again for posting!

  4. whyareyoureadingablog on August 9th, 2007 4:27 am

    Back up your views with some references and figures and provide some alternatives instead of just spouting opinions, allegory and conjecture. I’m so sick of people submitting opinion articles without references or any facts to back them up. Do research. Use the google.

    I just made a post which actually shows research on this topic.
    http://whyareyoureadingablog.blogspot.com/

    Your argument about freedom of contract has been stale since the Great Depression. The Supreme Court settled that one in “West Coast Hotel Co. v. Parrish” in 1937
    http://en.wikipedia.org/wiki/West_Coast_Hotel_Co._v._Parrish

    Your point about Wal-mart is specious and irrelevant since they pay above the minimum wage.
    “According to studies, Wal-Mart pays between $8.23 and $9.68 as its national average. That means that the minimum wage could be raised 50% and still not impose higher costs on the company.”
    http://www.mises.org/story/1950

    As for personal responsibility, you are correct, sir. If someone doesn’t like what they’re being paid, then go out there and improve your skills and find a better job.
    Still, your logic may be sound, but your argument is weak without evidence.

  5. Jason Dean on August 9th, 2007 4:43 am

    Thank you for your response.

    As for the lack of facts and citations in this article; I am constrained by the format. A book can be written on the subject; certainly. But this is a blog, and the point of this post was to evaluate two sides of the issue, which I think I did. There are plenty of facts and data cited actually, in the argument for the minimum wage. I don’t see where facts or data are lacking when the general principle is that the actions of two consenting adults should not be regulated by government force. It is a moral issue, and as far as I’m concerned, people who think the relations of conesting adults should be regulated by government are simply on the wrong side of any moral debate.

    My point was merely that Wal-Mart COULD absorb a minimum wage hike much more easily than small businesses can. How is this untrue? What facts need to be cited in support of this assertion? I’m well aware that Wal-Mart pays more than the minimum wage, and I did not intend to indicate anything else. In fact, this makes their support for a minimum wage hike even more dubious, since they are much more likely to benefit two-fold: 1) More money in the hands of their low-wage customers; and 2) Increased stress placed upon their small-business competitors.

    Sound logic need not be backed by evidence. Sound logic is self-evident. Challenges to the logic must be contested with evidence.

    Thanks again for the post.

  6. whyareyoureadingablog on August 9th, 2007 5:18 am

    Economic theories should be evaluated by their impact to the people involved, not merely on the basis of an abstract “freedom of contract” doctrine. The government regulates the economy, including wages. Arguing against the morality of it is like spitting in the wind, it won’t change anything.

    Your assertions that a minimum wage increase will harm small businesses and investors is vague and not backed up by evidence. How much will it impact them? Is the social good of higher wages greater than the offset of slightly less corporate earnings? Maybe a small business will just cut hours or jobs to stay afloat.

    I also disagree with the assertion that blogs are a limited format. Blog posts don’t need to be short. Take the time to develop your arguments more fully and they will be a lot stronger.

  7. Rosie Coyote on January 2nd, 2009 2:12 pm

    I’m 58 years old and today is 1-02-2009 and with the wage increase i’m doomed to higher prices on goods and losing my food stamp benefits.Don’t people know by now every time you raise the wages,the price of goods go up and some people lose their jobs if they work for small business?Really hate this situation.

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