Pick up an introductory Economics text book and open it to its discussion of minimum wage (alternatively, keep reading here). You are likely to find at least one of two things: a discussion of why a minimum wage is a fantastic way of creating large market failures (e.g., unemployment) like a crusade in the name of equity; or a description of the minimum wage as a way of fixing a present market failure, the discrepancy between the social and market values of an hour of work.
In fact, economists don’t generally agree. A study performed in 2003 at Weber State University surveyed 1,000 economists in the American Economic Association (AEA) (298 responded) on their consensus on general economic ideas. The survey found the economists were equally split between thinking equity in income was a positive worth pursuing. But assuming that it is, for the time being, is a minimum wage the best way of achieving this end? The study showed economists were split: half agreed minimum wages are a likely culprit for increases in unemployment in young and unskilled workers. The other half either outright disagreed or thought the question was stated incompletely.
Disagreements notwithstanding, President Barack Obama proudly announced time and time again, in addition to posting it on his website (hip enough to compete with that of the Argus Online) his stated mission to “raise the minimum wage to $9.50 an hour by 2011.” It is, perhaps, more prudent to start analyzing this policy with an eye towards its historical path-dependence.
The first minimum wage, federally imposed, came in 1933 with a whopping 25¢ (bear in mind, the first Burger King Whopper didn’t appear until 1957, for 37¢) as part of the National Industrial Recovery Act. This whole act was declared an unconstitutional delegation of congressional power in 1935 with the Supreme Court’s decision in Schechter Poultry Corp. v. United States. The minimum wage was subsequently resubmitted on its own in 1938, however, and has been federal legislation ever since. It reached its highest spending power in 1968 and has, except for the eighties and the ten years between 1997 and 2007, been generally adjusted for inflation.
So there is clearly precedent for a minimum wage, and if you agree that there should be one, you should probably be in accord with the Obama administration that it needs to be adjusted occasionally depending on the economic environment. But what is it, exactly, that people hope a minimum wage will accomplish? Well, first and foremost, there is the ethical approach. One measure of the success of a government is how well it treats its most vulnerable members. That is, we observe a group on the lower end of the pay-scale and we believe that they are being unfairly compensated for the work they do. Or, we believe they have a right to at least enough compensation to remain above the poverty line. The unregulated market will do neither of these, so minimum wage advocates reasonably hope the government will step in and protect the rights of its citizens, like it would the right to property or privacy (currently contentious rights).
Unfortunately, this frame of the problem is not strictly economic. It is instead the value a government places on its moral obligation to protect its citizens. So, is there an alternate theory of redistribution to which we can compare? Let’s think about another relatively common solution for people pining for public philanthropy – welfare payments. In a welfare situation, a government offers aid to those who can prove they are among the lowest income earners, disabled, unskilled, or uneducated. A mainstream challenge to this redistribution tactic is that it incentivizes its recipients to stay out of the labor pool, and continue receiving the checks. On the other hand, some theorists say higher wages encourage employees to work harder. Thus, a minimum wage, unlike a welfare check, is not culpable for its recipients becoming societal parasites.
Here we rejoin the approximately 130 AEA economists who were generally certain a minimum wage increased unemployment in young and unskilled workers, which many of us fill over the summer. When Burger King is forced, by law, to pay its employees more, it is less likely to hire and even less likely to hire those who need training. In principle, this should negatively affect many of the people to whom we are trying to distribute income. Burger King might alternatively find its manufacturing or customer service jobs could be cheaper by outsourcing in nations without similar regulation. For the grassroots rightists, these “stolen” jobs don’t sit well; for the liberal leftists, the lack of regulation often goes hand in hand with unhappily worse human-rights conditions. For all, our Whoppers might be in real danger.
The truth is no matter where you fall in the ethical discussion of a government’s treatment of its most vulnerable members, there is little need to worry much about Burger King withdrawing from the market. Besides, if things really went sour (and chances are they won’t be because of a minimum wage increase), we could probably depend on the government to bail out our precious supply of cheap food.
Still, start your engines and apply early for your summer jobs before the 2009 increase pops into effect on July 24th and “hiring” signs begin to disappear in an already strained economic environment.
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