Is the Minimum Wage a Good Idea?

Certain things which are taken for granted at one time in history would be unthinkable at others.  I do not mean bad or obvious but literally unthinkable.   Do you imagine that it would have even occurred to Thomas Jefferson in 1776 to call out King George on his failure to allow gay marriage?   And yet, two plus centuries and a Supreme Court ruling later, all states now allow this practice. A hundred years from now, one can extrapolate that failing to allow gay marriage may well be viewed as barbaric as slavery. 

Which brings me to the minimum wage.  The earliest minimum wage law was passed in New Zealand in 1894.  In 1912, Massachusetts became the first US state to impose a minimum.  After SCOTUS declared the practice unconstitutional in 1923, it reversed itself in 1937 and the federal government imposed a national minimum  pay level in 1938.  The minimum wage is now considered such a basic protection for workers that any debate is limited to its level, not its existence. 

My usual question to proponents of a higher minimum wage is:  If $15 is good, why not $100?  I have only once heard that question addressed to a talking-head on TV and the response was a derisive laugh and, with a sneer, Why not zero?   Zero was as unthinkable as dealing with overpopulation by shooting every other person.  However, in most times and most places throughout history, the minimum wage was in fact zero, i.e. there was no minimum wage. 

The argument for the minimum wage is apparently that there is a level of compensation so low that it is inherently exploitative and that it is beneath human dignity to work for so little.  The corollary is that it is better to have an idle worker and an unfilled job if a specific job cannot justify the minimum proscribed level of compensation.  The argument against the minimum wage is that it promotes unemployment and denies work opportunities, particularly entry level jobs, to those whose skills are currently insufficient to justify the minimum wage. 

One can argue that all labor is worth at least some minimum but that is not true.  If one cannot produce sequined garments because the intensive labor required can only justify a wage well below the required minimum, then there will be no sequined garments produced, at least not where the minimum wage prevails.   That is precisely how the minimum wage precludes certain jobs and thereby causes unemployment. 

Applying a little logic gives a useful estimate of the degree to which a minimum wage causes unemployment.  Consider the widest possible range for the minimum wage.  Because no one would work without compensation, the market rate for labor would never actually be zero.  Assume then, that $1/hour is the lowest possibility wage.  (It was a different time, but the original minimum in 1938 was a quarter of that.)    

There are professional workers who do earn in excess of $100/hour, but within the sub-elite labor force, there are virtually no jobs that pay that well.   At the high end, then, assume a minimum wage of $100/hour.   Within this extreme range, consider then what would happen as the minimum wage increased at one dollar intervals between $1/hour to $100/hour.

The correlation is logically self-evident. If the minimum wage were $1/hour, there would be virtually no limit to the demand for labor.  If fact, the minimum wage would be irrelevant because the market rate would be higher.  At $100/hour, on the other hand, unemployment would approach 100% as there are so few jobs which warrant a wage that high.  So, with a $1/hour minimum wage, unemployment approaches zero whereas at $100/hour, it approaches 100%.  While the curve between zero and a hundred would not be a straight line, the average loss would be one percent of the workforce for each dollar of increase in the minimum wage.    

This is a thought experiment, not a specific model of the effect of a minimum wage in a functioning economy.  It logically shows, however, that there is a direct correlation between unemployment and the level at which the minimum wage is set. 

Who benefits from an increase in the minimum wage and who suffers?  First, those already making above a newly increased minimum wage are unaffected.  Next, those with a skill level not even close to warranting the minimum wage would also be unaffected.  They were unemployable before the increase and are moreso after.  This leaves only those with a current wage level just below the new minimum wage. 

Labor markets are not perfect and are at least minimally flexible.  One might therefore conclude that someone at $14/hour would not lose his/her job if the minimum wage rose from, say $13/hour to $15/hour.  If, however, a local jurisdiction raised the minimum wage from the federal standard of $7.25/hour to a local standard of $15/hour, surely there would be a significant loss of jobs.   There are jobs which pay $7.25/hour which just cannot warrant $15/hour.  The employer cannot pay $15/hour to an employee whose labor is only worth $8/hour or $10/hour to the business.  At least not for long.  He/she would have several options; among them are cutting back on the number of employees, turning to automation or cheaper foreign labor or simply closing the doors of the business. All lead to increased unemployment. In this case, if the business is to remain viable, those workers near the old wage of $7.25/hour would likely lose their jobs while those already close to $15/hour would get the intended raise and likely remain employed.

Advocates for the minimum wage perennially push for yet a higher minimum. Because many jobs are useful but not worth an arbitrarily minimum, they are unsustainable. This idles many workers with minimal skills who need nothing more than an entry level job and an opportunity to develop more marketable skills. The minimum wage effectively makes paying the market value for useful work that is minimally skilled into a crime. Denying workers, particularly young workers, access to these jobs is an even bigger crime.