Wednesday, October 26, 2005

Minimum wage

Wal Mart is calling for an increase in minimum wage.

However, they are not leading the way by raising wages for their own employees.

They hope that a higher minimum wage will result in more people spending more money at Wal Mart.

The minimum wage has been set at $5.15 for about 10 years, and Wal Mart backs an increase to $6.25. Personally, I believe that if we are going to have a minimum wage, it should be indexed to inflation, as should breakpoints in the income tax laws. But let's take a look at the economics of the minimum wage and evaluate if it is a good idea to begin with.

The main proponents of minimum wage, and of increases in minimum wage, are labor unions. They argue for increases, saying "$5.15/hour is not a living wage." That is true. Someone working full time at minimum wage will earn about $10,300 in a year. It is not intended to be a living wage. No one is supposed to support a family on minimum wage. High school kids working summer jobs are the only ones who actually are paid minimum wage.

If you have been working for years and have a spouse and kids and are still being paid minimum wage, its time to develop some skills, maybe take a few courses, and get a new job.

Labor unions want increases in minimum wage not because their members earn minimum wage, but because their salaries are tied to minimum wage, either implicitly or explicitly. Some union contracts define the members' salaries as a function of minimum wage. If the contract says that the workers get two and a half times minimum wage, when Congress raises minimum wage by a dollar, the union members get a $2.50 raise. But even if the contracts are not directly tied to minimum wage, the wage compression caused by an increase in minimum wage will drive union salaries higher. This is why unions favor an increase in minimum wage.

What are the unintended side affects of a minimum wage?

First of all, the minimum wage is an artificial barrier to entry-level jobs. If some particular worker will only provide $5.50 of benefit to an employer, and Congress raises minimum wage to $6.25, that worker will not be employable. That person may just need a year or two of experience to become a more productive employee, but the lowest rung of the ladder has been cut off, making it difficult for him to start the climb to better-paying jobs. If the market price for a certain job is below minimum wage, we have essentially told people who would take those jobs that they can not have a job.

Secondly, the minimum wage is inflationary. By increasing the cost of doing business, some companies will be forced out of business, reducing the supply of goods and services. The other companies will roll the extra cost into the price they charge for those goods or services. The result is that a significant part of the increase in wages is eaten up in higher prices, and does not increase the standard of living of the people it is intended to help.

Third, the minimum wage drives the illegal job market. Thousands of illegal immigrants enter the country every year because they can illegally get a job which pays below minimum wage. The fact that this is desirable indicates that the job pays better than what they could get at home. If employers could legally hire legal workers for these jobs at market wages, they would do so rather than risk hiring an illegal worker. We need a better guest worker program to let people legally enter the country to work in these jobs, but we could also address the problem by eliminating the minimum wage.

The minimum wage drives up costs of doing business. These costs are passed along to consumers in higher prices. It increases unemployment and inflation and creates an illegal labor market. Free market pricing of labor is a more efficient method than government regulation, and results in a stronger economy which provides opportunity for everyone to benefit.

No comments: