Below is a reprint of an article that appeared originally in the Austin Business Journal, way back in 1995. Later, in 2007, I updated the article, because the drums were beating yet again to raise the minimum wage. Unbelievably, here we are once again with many people pushing an increase in the minimum wage.
Raising the Minimum
Wage: Who Benefits, Who Loses?
by David L. Kendall
January 26, 2007
In 1964 I turned 15 and landed my first real summer job
washing dishes in a restaurant. Somehow,
I got the job over several others who also wanted it. My first wage was 80¢ an hour—45¢ below the
$1.25 federal minimum wage that year.
It might take an army of lawyers to figure out whether my
employer was breaking federal law by not paying me minimum wage. But legal or not, I was thrilled to work for
80¢ an hour. That summer I learned a lot
about holding a job, personal responsibility, and forgoing summer fun with my
friends. I even got a raise to 90¢ an
hour after the first month. More
important, I earned about $385 over the summer, an enormous sum for me at the
time.
Franklin D. Roosevelt sponsored the first federal minimum
wage legislation with the National Industrial Recovery Act of 1937. The Supreme Court declared that act
unconstitutional. But undeterred, one
year later Congress legislated a federal minimum wage of 25¢ an hour in the
Fair Labor Standards Act.
The 1938 act covered wage earners only in industries
involved in interstate commerce. But
over the years, Congress amended the law to increase the federal minimum wage
and to extend its reach. Federal minimum
wage law now applies to about 70 percent of the work force.
The drums are beating again in Washington to raise the
federal minimum wage from its current level of $5.15 per hour to $7.25. With House Speaker, Nancy Pelosi as chief
drummer, several legislators and pundits are claiming the moral high ground for
wanting to raise the federal minimum wage.
Supporters argue that $5.15 is not a “living wage,” and therefore, the
moral, ethical thing to do is raise it.
But is raising the minimum wage the moral high ground? Should those who oppose the minimum wage hang
their heads in ethical shame? Who will
benefit and who will lose? A closer look
and a little reasoning may be helpful.
Myth Number One—unless forced by law to pay higher wages,
businesses will exploit workers, forcing them to accept a low wage. The truth is that fewer than 7 million
workers—about 5 percent of the workforce—received wages below $7.25 in 2005. Conclusion:
most wage earners receive wages higher than minimum wage, even though no
law requires it.
Employers are willing to pay more than minimum wage because
they are in business to earn profit.
Just as most people are willing to pay costs to earn
income—transportation, lunch, and day care expenses, for example—businesses are
willing to pay costs to earn income too.
In fact, businesses are willing to pay workers whatever wage will
maximize profits.
But willing or not, employers are not able to pay workers
more than they’re worth. The wage
workers are worth per hour in business depends on the value of goods or
services they produce, and how much they are able to produce each hour. Fortunately, a huge majority of workers in
America produce goods or services each hour that can be sold for far more than
minimum wage.
My employer during the summer of 1964 was a good, kind
man. But he was also in business for a
living. Owning and running a restaurant
was how he and his family earned their income.
Like any other business—small or large—he had to cover all his costs of
doing business, including a profit for his family’s income. Otherwise, he would soon have been out of
business. He paid me what I was worth
that summer. Had he been forced to pay
me minimum wage, the cost to his business would have been about $600 for the
summer instead of $385. Would he have
hired me if the law had required him to pay me more than I was worth? Plain sense suggests no.
Myth Number Two—minimum wage law helps the poorest, least
advantaged workers in society. Belief in
this proposition may explain why so many Americans favor raising the minimum
wage. Much closer to the truth is that
the minimum wage helps one set of “have nots” at the expense of another set of
even poorer “have nots.” A simple
example helps explain why.
Suppose that a company is now paying $5.15 an hour for 400
hours of labor supplied by 10 workers, each working 40 hours per week. Suppose also that the business is paying 100
other workers various amounts more than minimum wage. Raising the minimum wage to $7.25 an hour
would increase this company’s weekly wage bill for the 10 minimum-wage workers
from $2,060 to $2,900, an increase of $840. How will the hypothetical business
respond? Let’s consider several options: (1) raise prices to consumers, (2) accept
lower profits, (3) reduce wages of workers who earn more than minimum wage, or
(4) lay off some minimum wage workers.
Most employers have no ability to “pass it on” to
consumers. If businesses could raise
their product prices anytime they wished, why wouldn’t they already have used
their hypothetical market power to increase profits? Raising price to consumers, other things
unchanged, has a predictable outcome—a drop in sales. Our hypothetical business
can ill afford to lose sales. After all,
its weekly costs of doing business are up $840, due to the increase in minimum
wage.
What about accepting lower profits? This option seems reasonable to
some—particularly to people who think “profit” is a four-letter word. But keep in mind that profit is someone’s
income. Is it any more reasonable to
expect employers to accept lower incomes by decree of law than it would be for
you or me to accept lower wages or salaries?
Which brings us to the third option, reducing wages of
workers who already earn more than the new $7.25 minimum wage. Are you and I ready to be one of those
workers? Paying some workers less than
they’re worth to allow paying other workers more than they’re worth isn’t
really much of an option. Remember, what
a worker is worth has nothing to do with the worker as a human; only that
worker’s worth as a producer of goods or services.
That leaves option four.
Our hypothetical company can keep its weekly wage bill from rising by
reducing its use of minimum-wage labor by about 116 hours per week. Which workers would lose their jobs if the
company chooses this option? They will
likely be the least skilled, least productive workers. Arguably, they will also be the poorest,
least educated, least advantaged people—those most in need of even a low-paying
job—whether it’s a “living wage” or not.
If low income is bad, no income is worse.
How will real companies all across the nation respond to a
higher minimum wage? Companies who can
do so will raise prices to consumers, but competition at home and abroad will
severely limit that option. In the short
run, business owners may absorb the increased wage bill through profit
reductions. But in the long run, stockholders
and entrepreneurs must earn a normal profit or they move their capital resources
elsewhere. In the long run, higher labor
costs will not be paid for with reduced profits.
Wages of workers already earning more than minimum wage will
certainly not decline. Oddly as it may
seem, raising the minimum wage tends in the long run to increase wages of
skilled, experienced workers. Faced with
a higher minimum wage for unskilled labor, companies demand even more skilled
labor. It’s really just sensible
economics. A higher minimum wage for
unskilled labor makes skilled labor relatively cheaper, other things
unchanged. Savvy business owners always
want to use more of a productive input that becomes relatively cheaper—and less
of inputs that become relatively more expensive.
In the end, once business firms make long-run adjustments to
a higher minimum wage, workers who aren’t worth the higher minimum wage to
their employers will lose their jobs.
Minimum wage legislation does not and cannot force employers to hire
workers who are not worth the legal minimum wage.
Who gains and who loses if Congress raises the minimum wage
to $7.25 and hour? Supporters in
Congress clearly gain by doing what appears to be a highly visible “good.” Some voters like the idea of guaranteeing
higher incomes to low income earners.
But the good comes at the expense of others in the labor force who earn
even lower incomes. The losers are
generally willing, hardworking people with the poorest educations, the lowest
skill levels, and the least ability to help themselves. Fortunately for Congress, the harm done is
evidently out of sight to most Americans.
Better still for Congress, the losers don’t make campaign contributions,
and many of them seldom vote.
Workers who lose jobs or cannot find jobs that pay the
higher minimum wage will have even poorer choices than they had before the
increase. They may retreat to the
welfare rolls, or they may find a job that can legally pay them less than
minimum wage. Most will choose a job—or
perhaps two jobs—that pay less than minimum wage, because most are self-respecting,
hard working people. But if unskilled,
inexperienced workers cannot get in on the ground floor, it’s even less likely
that they will make it to the second floor.
If a higher minimum wage could somehow transfer income from
wealthy “haves” to disadvantaged “have nots,” then raising the minimum wage
might be defensible on moral, ethical grounds.
At least it would be debatable.
But to use the force of law to take from really poor “have nots” to
benefit slightly better off “have nots” may not be what most people would call
ethical behavior. It no doubt depends on
how you look at it, but perhaps there is no moral high ground available to
supporters of a higher minimum wage.
