The Minimum Wage and Unemployment

For those not yet paying attention to the presidential race yet, CNN hosted a debate in the Reagan Library last night…

I’m not going to discuss candidate performance too much. Perry did horribly, Huntsman tried to matter, what few questions Ron Paul got required much more nuanced responses than can be fit into a sound byte, and Romney won by default.

But, any political fanatic knows that the real action happens on twitter, reddit, facebook, youtube, and candidate forums in the 24 hours after the show. This is as much due to the excitement and debate as it is to the incredibly stupid bastards trolling these sites. I’d like to address two arguments that people try to advance in online debates. One is an economic argument, and the other an attempt to deflect incoming criticism by citing the constitution.

The Economic One
I don’t recall how, but the minimum wage came up as a topic last night and Ron Paul spoke briefly saying that he’d abolish it on the federal level. Not long after the debate, i wandered across tweets and forum posts from geniuses saying something something to the effect of “I can’t believe the Ron Paul would repeal the minimum wage! He hates poor people! Employers would pay all employees $2 an hour! Libertarians all believe in social darwinism! It would be unbridled capitalism, a free-for-all!”

Its a compelling argument. If not for minimum wage laws, what is to stop corporations from paying all the poor $2 an hour and “enslaving” them? Why wouldn’t corporations and rich executives rule the country with a series of tyrannical monopolies? Thank god we have laws like the minimum wage for saving us from serfdom.

Shame that its completely baseless. Even if you accept the theory that corporations could do this, it is not borne out by reality.

For starters, only 6.0% of the population of paid-hourly workers is being paid at minimum wage or less. So if anyone is concerned about companies paying their workers less than minimum wage, they’re worried about a mere 6.0% of the paid-hourly working population – about 4.4 million people. This number WAS 2.2% in 2006, but it’s gone up due to the global recession/depression. Of this group, about 60% work in the service sector, mostly the food preparation and service-related fields, a large portion of which involve tipping, which is not tracked by the BLS.

Further, many are part-time workers, so as a portion of total man-hours, this means that an even smaller portion of hourly wages are at the minimum wage floor.

Finally, according to the BLS, about 50% of minimum wage earners are under the age of 25. It doesn’t take a sociology professor to understand that most under-25 workers are not supporting a family, many (if not most) are living at home, and an enormous amount are probably attending high school or college and just tying to make a couple extra bucks on the side. I did the same thing as a student at college. I worked for the IT department and got paid something like $7.40 an hour – the federal minimum wage is currently $7.25. It was awesome for beer money, but I certainly wasn’t trying to support a family on the side. There are many in the same situation.

Put this all together, and you see that a very small portion of workers are likely actually making the minimum wage. Its probably so small that it’s difficult to quantify how many people are truly being paid that 7.25.

What you should now be asking yourself is – “If the minimum wage were keeping many wages up, rather than causing employers to simply fire them (causing unemployment), shouldn’t we expect to see a large portion of workers pushed up against that lower-bound, minimum wage rate of $7.25?” Now you’re asking the right question. If employers who would otherwise be paying, say, $5.00 an hour were being forced by the minimum wage to raise their workers’ pay, we should see a lot more workers right up against that minimum wage rate.

Why don’t we? Because the minimum wage rate causes employers to lay off employees rather than raise their wages. Employers simply cannot afford to pay their workers more than their productive value. If a worker can only produce $7.00 of value per hour, an employer is not going to pay him/her $7.25, especially since the real costs to that employer may be higher due to compliance requirements and regulation. In reality, the employee probably needs to do quite a bit better than $7.25 per hour to make their employment worthwhile. This is pure economics 101. This is why the 16-25 age group, which has the highest unemployment rate, also comprises 50% of minimum wage earners, and has the lowest average wage rate. It is no coincidence that the age group with the largest portion of workers likely to be worth below the minimum wage rate is also the age group with the highest unemployment.

The consequences? Young workers, who are often unreliable and inexperienced, could be gaining valuable experience, albeit at a low wage. This would make them more productive and therefore more valuable, translating into higher wages later in their life and a little extra cash and independence in the meantime. Instead they’re being denied experience, semi-independence, and a few bucks on the side.

Meanwhile, the majority of those below the poverty line, who are largely making above minimum wage anyway, aren’t helped at all.

Keep in mind that nobody is, or would be, forcing the poor and young into these jobs – they have the power to turn down an offer and look for a better one. If you asked an unemployed worker whether or not they’d at least like the option of choosing between a $6.50/hour position and unemployment, rather than having unemployment de facto imposed on them by minimum wage laws, I think they’d prefer to have the option.


Note: I’ve already spent too long on this topic, so I’ll save the criticism-deflection-constitution-referencing-fail for tomorrow. Preview: Anyone who cites the first amendment in an attempt to shield themselves from criticism fundamentally misunderstands the constitution and simultaneously engages in self-contradiction


…and unfortunately probably votes.

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