Labor Market Stabilization, Poverty, and the Minimum Wage

Sarah Powell
Mr. Bolin
Economics 04_02 Political Editorial Option A
October 26, 2012

Labor Market Stabilization, Poverty, and the Minimum Wage 

The government should not raise the minimum wage because setting a minimum wage is an ineffective method of labor market stabilization and poverty reduction.  The labor market cannot be left to itself because it is imperfectly competitive, and while a minimum wage can help to stabilize the labor market, many of the other benefits that supporters of the minimum wage claim it has either only exist in theory or are not really benefits at all.  Therefore, there are other ways to address the issues of labor market stabilization and poverty, which the minimum wage seeks to correct, that will be more effective and have fewer bad side effects than raising the minimum wage has.
There are some who believe that there is no need for labor market stabilization, and that is why they do not support the minimum wage. (“Minimum Wage”)  If the labor market were perfectly competitive and the suppliers of labor and those who demanded labor had equal advantages, that would be true.  There would be no need for labor market stabilization.  However, the labor market is not perfectly competitive.  Employers have the advantage over workers because they have a fallback if they do not hire a certain worker – all of the other workers looking for a job – but workers do not necessarily have a fallback if they do not get hired by a certain employer. (Kaufman)  Also, employers can team-up and set labor prices making the the equilibrium price lower and the demand for labor lower than they would be in a perfectly competitive market. (“Minimum Wage”)  Therefore, there is a need for some form of stabilization in the labor market.
Because the labor market is imperfectly competitive, the minimum wage can present a couple of stabilizing factors that are beneficial to workers.  First, it can protect employees from receiving unfair wages in the imperfect labor market. (Kaufman)  It protects both from employers teaming-up to lower wages for workers and from employees selling their labor for less than it is worth if they feel they have no other choice.  Second, the minimum wage is one device that can help “ensure that some of the income gains and economic rents from productivity growth” get distributed fairly instead of just going to the guys at the top, such as the managers and owners of businesses. (Kaufman)  Otherwise, growing profits from company growth could end up in the hands of owners and managers with the employees getting no part of the company's growth in the form of more benefits or increased wages.  In those two respects, minimum wage can be a good thing.
However, many of the other things that supporters of the minimum wage claim it does for workers and the economy are either accomplishments that only exist in theory or are side effects that are not truly beneficial to workers or the economy.  First of all, supporters of the minimum wage claim that it “increases the standard of living for the poorest and most vulnerable class in society.” (“Minimum Wage”)  In reality, however, “only 5% of the workforce—some 6.6m people—will gain directly from a rise in the minimum wage, and 30% of those are teenagers, many from families that are not poor.” (“A Blunt Instrument”)  Therefore, a minimum wage is not truly an effect means of reducing poverty.
Secondly, supporters of the minimum wage claim that a raise in the minimum wage would increase job opportunities, increase the amount of money consumers put back into the economy through spending, and increase the country's Gross Domestic Product.  For example, supporters of the minimum wage claimed that a 2012 minimum-wage increase “would add $40 billion to the economy through higher wages, while adding 100,000 net jobs and increasing the Gross Domestic Product by roughly $25 billion.” (Maclay)  In actuality, though, most workers are employed in companies that pay a considerable amount above the minimum wage, and if they were to vote in favor of a minimum-wage increase, it would reduce their “real income (via higher prices) without any compensating gain in wages.” (Kaufman)  Therefore, any economic growth that might occur as a result of a minimum-wage increase would not actually benefit the majority of workers at all.
Also, in regard to the supposed growth of job opportunities that a minimum-wage raise creates, the truth is that a minimum wage reduces “employment of teenagers, high school dropouts, and other groups with low earnings.” (Becker)  More than that, it discriminates against these low-wage workers, “through pricing out,” because it keeps them from “accumulating work experience and qualifications, hence potentially graduating to higher wages later.” (“Minimum Wage”)  Gary S. Becker also agrees with this fact saying, “Higher minimums discourage on-the-job training of workers with few skills since they spend their time learning rather than producing.” (“It's Simple”)  In view of that, a minimum wage actually has the potential to damage the labor market instead of help it.  Both the job losses of younger, inexperienced workers and the employers' unwillingness to spend time training those workers because of the minimum wage restraints have the potential to eventually lead to a scarcity of skilled workers in all areas of the business world.
In regard to the increase in the Gross Domestic Product that a minimum wage is supposed to create, even if the growth did take place, that increase would come through the growth of already existing big businesses, not in the form of newer businesses opening or smaller businesses expanding.  For example, in 2005, Walmart's CEO lobbied for a raise in the minimum wage, but Walmart already boasted that it paid its employees nearly 50% more than the minimum wage at that time.  The CEO lobbied for the minimum wage to be raised because then Walmart's smaller competitors, who could not afford to pay their employees the way Walmart paid its employees, would be knocked out so that Walmart would have less competition. (Rockwell)  An increase in the Gross Domestic Product because of a raise in minimum wage is not worth the damage that a minimum wage raise causes to small businesses.
The third benefit that supporters of the minimum wage claim it has is that it “increases technological development” because “costly technology that increases business efficiency is more appealing as the price of labor increases.” (“Minimum Wage”)  This effect of the minimum wage, however, will not actually be beneficial to any workers much less unskilled workers who would typically earn the minimum wage.  This effect of the minimum wage will do the exact opposite of creating more employment.  As more employers look to technology for production, they will have less need for human workers, resulting in a lowered demand for workers and higher unemployment rates.
In view of the many less-than-wonderful side effects that a minimum wage presents, it is safe to conclude that there must be better ways to stabilize the labor market and help those in poverty than raising the minimum wage.  One such solution would be to establish a guaranteed minimum income for workers.  With a guaranteed minimum income, a sum equal to the cost of living would be provided by the government to those who passed a means test and are willing to participate in the labor market or perform community service. (“Minimum Wage”)  Another superior solution to the labor market problems and poverty is the Earned Income Tax Credit (EITC) already present in the United States.  As a “'negative income tax' that tops up the earnings of the low-paid,” its main focus is on families with children. (“A Blunt Instrument”)  Both of these solutions, however, are more difficult to implement or expand than a minimum wage raise because they require the spending of taxpayer dollars. (“A Blunt Instrument”)  Other possible solutions include creating a Collective Bargaining System or having the government set what percentage of company profits must go to employees. (Kaufman)  A Collective Bargaining System is a system in which employees, often members of a trade union, would bargain with the employer for “wage scales, working hours, training, health and safety, overtime, grievance mechanisms, and rights to participate in workplace or company affairs.” (“Collective Bargaining”)  This system is used effectively in Germany, Italy, Sweden, and Denmark. (“Minimum Wage”)  In the other solution mentioned, the government would determine what certain percentage of company profits must go to employees – not including managers.  The owner or manager could decide for themselves which employees deserved higher pay out of that percentage than others, but that would keep managers and owners from keeping the growing profits of a company to themselves instead of dividing it among all the workers.  Also, it would encourage the workers to work harder because they would get increased pay as the company's profits increased.  All of these solutions would more effectively stabilize the labor market and help reduce poverty than raising the minimum wage would.
All in all, the minimum wage does effectively help level the playing field in the imperfectly competitive labor market; however, the side effects that minimum-wage increases present make the minimum wage a less-than-worthwhile solution to labor market and poverty problems.  Superior solutions include having a guaranteed minimum income, the EITC, the forming of a Collective Bargaining System, or having the government establish a set percentage of company income that must go to employees.  The government should not raise the minimum wage, it should focus its efforts on other solutions that will more effectively stabilize the labor market and decrease poverty.

Illustration:

Because the labor market is subject to the same laws of supply and demand that all scarce resources are, the graph illustrates the dangers that can come when the equilibrium price is not paid (or charged) for labor. Deviation from the equilibrium price will result in either a surplus of workers or a shortage of workers. 

References

Becker, Gary S. "It's Simple: Hike the Minimum Wage and You Put People Out of Work." Bloomberg Business Week. Last modified March 5, 1995. http://www.businessweek.com/stories/1995-03-05/its-simple-hike-the-minimum-wage-and-you-put-people-out-of-work.

“A Blunt Instrument.” The Economist. Last modified October 26, 2006. http://www.economist.com/node/8090466?story_id=8090466.

"Collective Bargaining." Wikimedia Foundation, Inc. Last modified October 16, 2012. http://en.wikipedia.org/wiki/Collective_bargaining.

Kaufman, Bruce E. "Institutional Economics and the Minimum Wage: Broadening the Theoretical and Policy Debate." Cornell University. Last modified April 2010. http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgiarticle=1458&context=ilrreview.

Maclay, Kathleen. "Food Day Report Examines How Minimum Wage Hike Would Impact Both Consumers, Workers." Last modified October 24, 2012. http://phys.org/news/2012-10-food-day-minimum-wage-hike.html.

“Minimum Wage.” Wikimedia Foundation Inc. Last modified October 22, 2012. http://en.wikipedia.org/wiki/Minimum_wage.

Rockwell, Llewellyn H., Jr. "Walmart Warms the State." Ludwig von Mises Institute. Last modified October 28, 2005. http://www.mises.org/daily/1950.