Minimum Wage: Pros and Mostly Cons

The federal minimum wage was first instituted in 1938 to create a minimum standard of living to protect the health and well-being of employees . An act thought mostly as progressive, it is my opinion that most do not understand the economic nuance of the minimum wage. I do not blame them, why should they? It comes at no cost to be unaware or express positive sentiment leaving you mostly unaffected. Fortunately, economics seeks to study the fine details of the minimum wage. Which includes the behaviors of the marketplace in reaction to it and the subsequent “hiking” since. With the topic of minimum wage recently being subject of social commentary, I feel it is important to explore the idea.

Background

We reminisce on the establishment of a federal minimum wage as a historically progressive achievement. In some rights yes, but it comes with an inherent trade off. Which happens to be at the detriment of youth, minorities, and the poor. This occurs as what is called an “unintended consequence,” simply a law that refers to how economic decisions may have effects that are unexpected. A common occurrence in public policy. The fundamental truth is that us as citizens must elect those that align with our values to weigh costs and benefits of these trade-offs. I do not believe the public is aware of these trade-offs. Historically in minimum wage law, minorities and youth have suffered the unintended consequences. The last year in which the black unemployment rate was lower than the white unemployment rate (until 1948) was 1930, this was also the last year when there was no federal minimum-wage law. For further reference, (Age: 16–17) African Americans in 1948 had an unemployment rate of 9.4% while Caucasians held 10.2%. The 1948 unemployment numbers were at their lowest and as a fraction of unemployment numbers from late 1950s and on. This is because the inflation rate at the time effectively offset the minimum wage, resulting in the same lower African American unemployment as 1930… when there was no minimum wage. Prior to 1956, unemployment among youth African Americans aged 14 to 19 was around 8 to 11% Within two years after the legal minimum was raised to $1 an hour in 1956, unemployment among African American boys rose to 24% and Caucasian boys to 14%. Before the establishment of the minimum wage the barriers to entry were minimal. Unfortunately, due to the tragic and grotesque history of African American experiences — they were entering into a workforce at a skills deficit. The pattern of the market behavior continued as the price floor on labor continued to be hiked matching inflation mimicking the results of the late 1950’s into the 60’s, 70’s, 80’s and onward. A similar case to African American youth is seen in the skills deficit youth would have in general, relative to older laborers. This is important to note that post hoc data shows minimal if no change in unemployment to those in age brackets above the youngest in the workforce. Showing those in the labor supply with the highest productivity (the oldest sub-populations) are being chosen to fill jobs post minimum wage hikes. The same logic can be applied to those considered in poverty with the lowest skillset of labor supply. This phenomenon has continued from the 40s on and transitioning into modern concerns. Cue 2021 in the era of technology and stagflation. Now corporations can afford to replace the least productive laborers with capital. Estimates say a quarter of the U.S. workforce consists of some 36 million people who will be highly exposed to automation and could suffer displacement as a result. A hot button issue as Left-Wing politicians argue for minimum wage hikes beyond inflation. The sentiment seems less of an effort to avoid exploitation of work and more so by attempting to establish some sort of safety net at the expense of both firms and the lowest skilled workers.

Why…. Is it exploitation and Greed? Or just simply mathematics and economics?

Although exploitation and greed exist — the U.S. thankfully has legal measures to protect the worker from maltreatment or discrimination. For this case, I will explain what is exactly going on. Shift your perspective of the minimum wage as a monetary figure to also being a barrier to entry. Employers predominantly consider labor intuitively; we also have economics that provides the luxury of describing this behavior at a scientific level. The reason wage is also considered as a barrier to entry is because a threshold must be met to justify hiring a “unit” of labor. Getting there weighs on whether that hired unit of labor can display the productivity necessary to justify employment. Measurement of the productivity is called “Marginal Revenue Product of Labor (MRPL),” it is the product of marginal productivity (the extra output that can be produced by using one more unit of the input) and marginal revenue (incremental change in earnings resulting from the sale of one additional unit). Firms will hire labor until this productivity measurement equals the real wage rate/marginal cost. So, for our least skilled members of society… they suffer the punishment of an established barrier to entry and subsequently raised with every wage hike. Those lowest skilled members will not be able to provide the MRPL necessary to justify hiring (being equal to or greater than the wage rate/marginal cost). Effectively pricing them out of competing against those who are older and those who are retaining more skill. This is just one example of many regarding government policy aiming to protect while producing unintended consequences harming those who they intended to help. In my opinion, this is precisely why the government should not be responsible to upholding a “right to success” and should stick to the “right to be successful.” Effectively monitoring the ability to have equal opportunity. While technology continues to build on efficiency in the marketplace it presents opportunity for automation. This is neither good nor bad but a reality. When facing the “hiked” wages, firm owners (if in the position) will be faced with the choice of attempting to maintain less labor or choose take advantage of modern technology. When labor tends to become more costly, the firm is more likely to reinvest in capital i.e., automation which may maintain the same marginal productivity of labor but with less cost over time. This is a form of substitution. So not only does a minimum wage hike force firms to readjust labor demand they must also determine whether to invest in technology over human capital.

Future implications

In a libertarian utopia, I would prefer not to see a minimum wage much like our friends in Denmark and Sweden. If we choose to accept the trade-off of minimum wages to out-price those who need it most, I believe some amendments could be made. One being the simple idea that the hike should match inflation to maintain the same wage and poverty line. This is reasonable unless the federal government starts redefining the poverty line. Another idea I tend to see fit is the notion that minimum wages should be handled on the state or metro level. A federal minimum wage cannot account for cost-of-living adjustments. Do you really think the average price of a specific basket of goods in Pennsylvania cost the same as in California? No, of course they do not. “X” dollars in Pennsylvania and “X” dollars in California are not worth the same. This is a surefire way of amending the minimum wage to at least have regional specificity and create relative suffering to private business/low skill labor. After giving an economic perspective — I am also interested in the political implications. To those pushing for minimum wage hikes, is it generally reasonable to propose an idea that come at a cost to private entities while those who speak the idea bear no cost. The virtue signal itself comes with no repercussion; I would argue a net benefit. That signal pleases the base by showing the willingness to care for the those who need it most while also characterizing those on the other side of the aisle as the ones who do not. Clearly a political win, while those who push the idea rely on your ignorance as to what the actual effect is and historically has been. Think twice about characterizing those who disagree with you as heartless or those who do not care.