Note from Ben:
I have periodically explored the consequences of government intervention in free markets, which I believe are largely self-defeating and produce unintended long-term consequences.
One of the first posts on this lowly blog explored the way in which government guarantees on deposits via CDIC (Canada) and FDIC (US), while seemingly a good thing, indirectly led to the great credit crisis of 2008-2009.
It’s a topic I enjoy discussing. Today I present a guest post from M.G. in which he argues against government-imposed minimum wage.
The downside to minimum wage.
Most people think of minimum wage as a good thing. Many think that it’s the sign of a healthy economy to have a high minimum wage, or that it’s needed to prevent ‘evil’ businesses from taking advantage of the weak and poor. It would be considered almost blasphemous to say that the occasions of minimum wage helping our economy or the ‘poor’ are significantly outweighed by the downsides. However, that is what I am pointing out today.
First, let’s get on the same page. I think we can all agree that employment opportunities offered by businesses would not exist without invested capital in those businesses. We should also be able to agree that employees are taking advantage of that invested capital in order to gain something for themselves—income.
When we look at minimum wage in detail the negative effects become clear. Example: a local business man starts a factory that will compete on the global market making widgets. After investing a substantial amount of money, he starts hiring individuals to use his invested capital to produce widgets. The manufacturing is very simple and safe, so he offers minimum wage to his workers. His profit margin on the widgets is small. Let’s say that the factory owner’s cost is $10 per widget and he can sell it on the global market place for $12 per widget.
His costs include his employees wage, utility costs, and any other licencing/permit costs that he must take on. It takes approximately one hour to manufacture a widget at an employee wage of $8 an hour. This factory is just making enough to justify all the invested capital. Now let’s say that minimum wage goes up to $10 an hour. All of a sudden, his unskilled labour is costing him much more and there is no more profit to justify the investment. Because the global economy can produce the widgets at a significantly lower cost due to inexpensive labour, there is no point in competing. The business man loses his capital and the employees lose their jobs.
In a local economy, when minimum wage goes up, it simply creates nominal inflation. The local coffee shop would need to put their prices up to compensate for the extra in payrolls, and then fewer people would buy coffee (which would start a spiral effect) or people would demand more income from their employers to help support their coffee habits (and other higher prices).
There will always be a business where the current minimum wage is just on the edge of making business capital worthless. Examining these extreme cases illustrates my point – that minimum wage decreases a business’ competitive value in a global marketplace, and produces a type of inflation in a local marketplace.
Specific downsides to minimum wage:
Let’s view other downsides of minimum wage, one at a time.
Why finish high school? These days getting a job is difficult, but what is the point of finishing high school if you are already making minimum wage? The only way to make more would be with a college or university degree, an option which is not for everyone. The income potential between no high school education and having your diploma is minimum and getting smaller each year. So where is the incentive? Salary statistics indicate that minimum wage has decreased the difference in income between having no high school education and having a university degree. Higher wages for people with post-secondary degrees do not increase when minimum wage does. Closing the income gap between blue-collar and white-collar workers lowers the incentive to achieve the payroll clout of higher education in the first place.
Why does the government increase minimum wage anyway? Do the people demand it? Yes. For the most part, the ones already making minimum wage are the ones who demand it be increased. Do the businesses encourage it? Yes and no. Let me explain: some businesses, like the ones that already employ workers at more than minimum wage, encourage minimum wages to go up. This might be a sinister move – a ploy to reduce start up competition, but it might simply be because it is thought to be in their best interests for the masses to make more money, and therefore be able to spend more on the business’ wares. Large, economically intelligent businesses may even like minimum wage because they know that jobs will become scarce and thus they will be able to keep their current workforce for less. When jobs are scarce, employees no longer have the bargaining power to hold out for increases in pay. Does minimum wage help the government? Of course it does; they gain more income tax and they persuade more people to believe that the government is benevolent.
What happens to all those people who have lost their jobs? Many of them might find another job, but some find themselves on some form of government funding (welfare, unemployment insurance, disability). With less capital investment for businesses and even less for global competition, manufacturing jobs start to get scarce and people start to get desperate.
One of the major problems with minimum wage is that the lower class ends up having even less money. If minimum wage didn’t exist, there would be more jobs and less income all around, but other businesses would be able to crop up and cater to these lower earners. In the current state of affairs, these people have no money because they have no jobs (unless they are on a government funded program—and therefore under government control), and there is next to no chance that a new business will be able to start offering services geared to their needs. A small amount of these people end up on the streets.
So now let’s flip the coin and see what the benefits of minimum wage are. You may think that the fact that the government can now collect more taxes is a good thing, however, because the government does not use this money to create more capital, my point of view is that this is a bad thing. I will leave this for you to figure out.
Does minimum wage help out big, ‘evil’ corporations? First of all, I need to clear something up. Greed cannot be maintained without the presence of violence or duress. A simple example of this is the loan. A loan cannot be greedy, nor have anything in its agreement which is inherently greedy. It may be biased; however, due to the fact that both parties must agree to the terms, neither party can be said to be greedy. If one does not agree, they can simply find someone else to make a loan agreement. The individual providing the loan has the vested interest in making sure the risk is taken into account and that the borrower succeeds so the loan can and will get paid. So no agreement can really be called “greedy” unless one party is forced into it. This works for private loans, the banks, which make money out of nothing, take more risk, but I digress.
The same thing applies in employee-employer relationships. If an employer is unfair with their pay rates, people will move on, or another business will offer their employees slightly more pay until a balance is found with what employees want and what businesses can pay. The only time a business can take advantage of employees is when jobs are scarce. This can either happen where there exists a government-forced minimum wage, or an excess of available employees (such as in China).
There isn’t really a labour problem in China; their economy is just a reflection of the high population. The businesses there can invest less capital and just pay for more labour hours. You might ask yourself why labour in China gets paid so little. The simple answer is that the available employees are willing to work for less because they can survive on less, and because in a market with a labour surplus, holding out for that higher wage will get you nowhere.
In North America, we have experienced the opposite. Too many jobs and not enough people to fill them. This is no longer the case now that we have completely lost our manufacturing bases.
– Decreases the ability to compete in the global market
– Decreases the number of jobs at the lowest end of the pay scale
– Lowers the income range between skilled and non-skilled labour, therefore removing incentives to self improve by seeking additional education or training
– Allows big business to take advantage of job losses by decreasing pay for employees in the upper tier
– Allows government to become bigger and tax more
Before you send me an email, telling me all about the miracle of minimum wage, please answer this. If minimum wage is such a good thing, why don’t we just make it $50 an hour, or even $100? Wouldn’t that just make the economy better? The problems you see with a $50 minimum wage applies in all cases, even a $10 minimum wage.