Minimum Wage is Not About Poverty

Decmeber 6, 2013
Oren Levin-Waldman

Minimum wage arguments centered on employment or poverty both miss the point. Opponents argue the standard model that raising the minimum will lead to lower employment. They cite a thirty year old study by the Federal Minimum Wage Study Commission that an increase in the minimum wage would lead to a reduction in teenage employment. The impact on adult employment was less clear.

Opponents also claim that only a small fraction of the labor market, around two percent, earns the statutory minimum wage. Therefore, its costs outweigh its benefits. Moreover, most minimum wage earners are either spouses or teenagers, not the primary breadwinners. Supporters say that most minimum wage earners are single mothers with children which places them among the ranks of the working poor.

Because the minimum wage has been viewed as a poverty issue it has become stigmatized along with other poverty programs. But the minimum wage was originally conceived of as a labor market issue. Adam Smith, whom critics of the wage often tout as the defender of free and unfettered market, recognized in The Wealth of Nations that wages made a statement about the type of society we want to be.

Smith observed that the wages workers earn, especially compared to other countries, reflect the wealth and overall strength of the economy. A nation that pays its workers poorly may in part be symptomatic of a nation that either stands still or is in decline. A society that wants to maintain a strong and viable economy must choose the high road rather than the low road. The minimum wage is one institution that leads us towards a higher paid workforce where employers will have incentive to invest in their workers.

A hundred years ago economist Sidney Webb argued that a minimum wage was an efficiency wage. Better paid workers would be better able to support themselves. They would have more energy, their morale would be boosted, and they would become more productive. As a result, overall efficiency would improve. Webb also says that a minimum wage would push employers to educate their workers. By Investing in their workers, their workers would be returning to them greater value in exchange for the higher wage. The efficiency argument of a hundred years ago still holds true.

Today competitive market theorists present the efficiency wage as a means to stop workers from slacking off. Workers who are better paid will not shirk for fear they will lose their higher paying jobs and be forced to take lower paying jobs. But employers who pay higher wages save on recruitment and training costs because higher wages also means that there will be lower turnover.

Early industrialists like Henry Ford recognized that higher wages would lead to economic growth when he set out to pay his workers $5.00 a day. Ford’s critics claimed that it was important for labor to be flexible and be prepared to accept lower wages when necessary in order to be employed. Ford maintained that if there was no middle class to purchase his cars, the auto market would never grow.

Reducing the minimum wage to anti-poverty policy really does nothing more than divert attention from the real issue: because there are ripple effects increases in the minimum wage mean that employers not only have to pay their minimum wage workers more, but those earning above the minimum wage more too. In turn, those workers at rates above those will see their wages increase. Critics, however, will say this causes inflation, but, there is a difference between good inflation and bad inflation just as there is a difference between good cholesterol and bad cholesterol. This was clearly understood by designers of the minimum wage in the first place.

Returning the minimum wage to the labor market is about shoring up the middle class. We as a nation pretend to care about the middle class, but we continue to push flexible labor policies where low-wages and no benefits are deemed to be essential to be remaining competitive in a global economy. A nation without a middle class cannot remain competitive.

To return to Smith for a moment, he wasn’t just making a macroeconomic argument, he was also making a moral one. What kind of society are we if we cannot maintain a middle class? Conservatives who tout free competitive markets and flexible labor also trumpet family values.

The reality is that a wage sufficient for oneself and one’s family to live with dignity is a matter of family values. It is time to move beyond the partisan talking points of family values and the middle class and truly embrace policies that support both.

December 6, 2013

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