The Tricky Thing About Minimum Wage

By Christian Stellakis

It is notoriously difficult arguing in the court of public opinion, especially when the court does not favor your point of view. It is for that reason that price floors and minimum wage increases are tricky subjects to navigate, due in large part to their overwhelming support among the people. The broad appeal of raising the minimum wage is easily understandable: it is a victory for the underdog, providing help to those low-wage workers that struggle to get by. These benevolent sentiments, though, disguise the challenges and repercussions of tinkering with the free market. Though increasing the minimum wage is not necessarily always bad policy, its effects are much more complicated than they initially appear.

The first, and perhaps most obvious difficulty with raising the minimum wage is the cost of jobs. In economics, there is no such thing as a free lunch; every decision comes at a price. The decision to increase the pay of low-wage workers causes firms to either lay off workers or cut their hours in order to make up for the loss in revenue. The result is higher unemployment and underemployment, two aspects that drag down the economy and prevent it from functioning efficiently. Though many people may be inclined to blame corporate greed for cutting employment rather than taking a hit to their profits, the decision is largely economic in nature. As real wages are raised to artificially high prices, the cost of retaining employees increases. The higher minimum decreases the firms’demand for labor, thus creating a surplus of available, yet unemployed workers, and preventing markets from clearing. The result is the dreaded ‘deadweight loss’, an economic term that describes the price the economy pays for performing inefficiently.

 The issue of minimum wage, though, is much more than just an economic debate. It cuts to the core of a social problem that plagues nearly every nation in the world: poverty. Many proponents of increasing the pay of low-wage workers argue that wage hikes help the impoverished live a higher standard of life. By mandating a larger paycheck, the government not only alleviates the economic challenges faced by minimum wage workers, but also decreases their dependency on the government’s poverty assistance programs by allowing workers to live independently on their income. While this line of reasoning may seem intuitive and even compassionate, it rests on assumptions that are tenuous at best.

 The first of these assumptions is that, by increasing the minimum wage, poverty can effectively be mitigated. Increasing the minimum wage creates what is essentially an insider-outsider problem; it benefits those already employed at the expense of those who are not. The worker layoffs will cost many workers a large portion of their income, possibly forcing them onto the government dole or into poverty. Additionally, the labor market will necessarily tighten as employers freeze hiring, making it increasingly difficult for people seeking jobs to find employment. This frequently leads workers to become discouraged and stop looking for a job altogether, placing an even greater burden on the economy. Ironically enough, the main justification for raising the minimum wage, alleviating poverty, is often an unnecessary pursuit. In the United States, for example, the annual salary from minimum wage is enough to keep a family of two above the poverty line.

Proponents often counter with the argument that minimum wage is insufficient to support an average sized family. On that point they are absolutely correct; low-wage workers simply do not earn enough to keep their families above the poverty line. This point, though, exposes their second assumption: that the minimum wage is either the primary or sole source of income. Again, at least in the United States, this assumption is more the exception than the rule. A study conducted by the Pew Research Center found that minimum wage workers only account for 2.8% of the workforce. Of those low-wage jobs, sixty-four percent of them are part-time, suggesting that the workers are likely to have a secondary source of income. What’s more, a disproportionately high percentage of minimum wage workers, about fifty-one percent, are between the ages of sixteen and twenty-four. The majority of the individuals holding these jobs are youths working primarily in the food service industry (think McDonalds), and are much less likely to be the sole or primary source of income for their family.

 There are a number of other factors that complicate the decision to raise the minimum wage. Wages linked to the minimum would be affected, and additional strain would be placed on small businesses and privately-owned franchises that utilize the minimum. Indeed, the minimum wage debate is deceptively tricky, and becomes increasingly complex the closer it is examined.

 Christian is a Junior at Hamilton College in Clinton, New York. As an honors student and member of the Dean’s List, Christian is pursuing a degree in Economics and Government. He was accepted into Hamilton after graduating Valedictorian of Chittenango High School, where he served as the Opinion Editor for the school newspaper. Christian is an avid member of the Hamilton College Debate Society and a frequent contributor to the political discourse at the college.