Minimum Wage Laws Just Keep People Poor

Over the past month, PolicyMic has published many articles on increasing the minimum wage. We have the moral case, the GOP case, even an unusual case. What is missing is the case that increasing the minimum wage or setting a living wage accomplishes a goal.

A minimum wage law is an off-budget tax on producers and consumers which transfers income to low-wage workers. This regulation allows the government to collect a hidden tax, and pay off-the-books welfare.

Increasing the minimum wage is more effective than providing traditional welfare.

The wage requirement differs from traditional welfare in that it does not specifically target the poor. Many minimum wage workers are not poor. Some are college students working part-time while living comfortably at home. Many are the secondary breadwinner in the house. Some are people like me who work part-time to get out of the house. Changing the minimum wage law will not lift these people out of poverty. They never were in poverty in the first place.

Ironically enough, increasing the minimum wage, which doesn't deal directly with poverty, creates additional income that triggers reductions programs which do target those in poverty. (Read about how safety net programs are affected by rising wages here.)

The law will only help workers who get to keep their jobs. The problem is the behavioral response to rising wages. Increasing the minimum wage for specific jobs will induce people who are out of the work force like housewives or retirees to return to the job market. The result is lower-skilled workers will have to compete for the same job within a higher-skilled applicant pool.

The most serious form of increased competition will come from automation. McDonald's may pay $10 per hour for someone to take your order, but at $15 per hour, the company may well transition to touch-screen ordering. Increasing the wage of a restaurant worker to $15 per hour only helps the worker if he gets to keep his job.

Neither form of welfare really solves the problem of poverty because both remedies deal with the outcome rather than the cause. The wage is not the cause of poverty, but rather the productivity of the worker that fails to command a higher wage. The visible outcome of unskilled workers is poverty. The cause of that outcome is productivity.

Critics say that lower-wage jobs have not kept pace with increases in productivity. For example, Dean Baker says that if the minimum wage had kept pace with productivity growth [since the late 60s] it would be $16.54 in 2012 dollars.”

Baker’s point has two problems. First, the baseline of the late 1960s is the highest minimum wage in real terms in the 75 years of the law. What he is really saying is that the minimum wage is lower in real terms today than it was at its absolute peak. Second, his concept of productivity fails to distinguish between productivity of capital and productivity of labor. By Baker’s logic, if General Electric upgrades a plant to increase productivity by 20%, the company should give the janitor a 20% raise. Capital created the gain, and the economic rents flow to the shareholders rather than to the worker.

The contrast between labor and capital productivity is clearly seen in the changes to the labor market in agriculture. Since 1940, farmers' role in the workforce has dropped by more than 80%. That reduced work force covers nearly three times the number of the irrigated acres. While productivity has increased substantially, the National Citizens Council for Migrant Labor says that wages fell by 16% in real terms, and that is seasonal work. Productivity in this case comes from the tractor and not the worker. The rents on the tractor flow to the owner, not the employee. 

If we are going to do throw money at the problem of poverty, we should be using targeted programs — not an untargeted program that disrupts the ability of the individual to get a job because it remains the best weapon against poverty.

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Brenton Smith

Professionally, I manage credit risk in bank deriviatives. Politically I write commentary for www.FixSSNow.Org on the issue of Social Security reform.

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