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Minimum Wage… Labor of Love?

by Guillermo Camoriano

Our society frequently debates the merits of the minimum wage.  Many people feel strongly that a “living wage” is imperative and in fact is owed to the worker so that he or she may have “self worth” and “respect”.  In this article, we consider the issue of the minimum wage and let you decide which alternative really addresses the issues of a living wage, self worth, and respect, especially for those individuals the minimum wage laws are “intended” to help.

There are two schools of thought on this matter, and we examine them both and then take them to the extreme to see if they still hold water (as an Engineer, I enjoy taking things to the extreme, to the limit, to see if the premises are based on a strong foundation and will not fall apart as we approach, and even reach, the limit).

1- Minimum wage laws are said to protect the worker, especially those at the lowest level of the pay structure (the unskilled, the uneducated, those without other opportunities), so they may enjoy a wage that allows them to live at a reasonable standard of living; a “living wage”.

            - Minimum wage laws obviously have no benefits for those already making well over and above the mandated minimum wage.  The corporate CEO making $ 500,000 a year (equivalent to $ 250 per hour if working a 40 hour week) does not benefit from these laws, and neither does the airplane mechanic making $ 25 per hour.

            - Contrary to popular belief, the minimum wage does NOT benefit the unskilled, uneducated individual who cannot demonstrate to the employer that he is worth more than the minimum wage.  If the employer has a job available that will pay the minimum wage ($ 5.15/ hour), but has an employee who can only make enough widgets (or flip enough burgers) to generate $4/hour in income (anything beyond that and you are losing money), the employer will let this employee go and hire a more qualified individual, one that can at least justify his pay, and then some, so he can make a profit.

            But some may argue that the employer should cut its profit margin and be forced to pay higher wages. If the employer is making a large enough profit to justify higher wages, then it will soon find that there will be competitors looking to share in those profits.  This will increase the demand for labor in that particular industry, and, if the employer wants to retain its employees (or perhaps attract more employees in order to expand its business), the employer will have to offer an attractive wage, which will take it above the minimum wage anyway.   Of course, this will reduce profits, and the marketplace will eventually find the point where a balance is reached. 

            The minimum wage law has had no positive effect on the previously described dynamics in the marketplace, except to the extent that those poor, unskilled individuals must now produce a return, to the employer, at least equal to the minimum wage in order to be employed.  Thus, if they are physically unable to provide this level of return or have a low skill level or are not reliable or dependable enough to justify the minimum wage, they are unemployable unless they are willing to work in an illegal, underground economy with even fewer protections and rights than they would otherwise have enjoyed.

            As discussed earlier, those workers who can provide a return to their employer at least equal to the minimum wage are not in trouble, but they are unaffected by the minimum wage laws anyway, since they are subject to the laws of supply and demand, which I term “natural laws” versus the “manmade laws” of minimum wages.  (In fact, everybody is subject to these same natural laws -- the minimum wage laws just skew them by reducing or eliminating the demand for unskilled labor, to the detriment of those individuals supposedly being helped by the minimum wage laws).

            Who benefits from the minimum wage laws?  The politicians who enact these laws to help unions, and the unions themselves are the beneficiaries.  As an employer, if you must hire someone for a certain minimum wage, why hire an unskilled laborer when you can hire a skilled laborer for the same amount?  For instance, if you need a laborer to dig trenches to bury electrical piping, why hire an unskilled laborer when you can hire an electrician’s helper to do the same job for the same wage?  At least then, if you need someone to wrap electrical tape around an electrical splice, this union member can do this and you will not get served with a union grievance.  These laws then protect union members from competition against less expensive labor by reducing the demand for this less expensive (more unskilled) labor with laws purportedly enacted to help the very individuals it harms.

2- Law of Supply and Demand:  As we have already discussed above, these natural laws actually are much better at helping the unskilled find employment and have a sense of self worth and respect instead of having to live off of hand outs (government  “welfare”) which actually makes them even more of a load on society and which cannot be very good for their sense of self worth.

Taking the minimum wage concept to the extremes:

            - If $ 5.15 / hour is good, why not make it twice as good and institute $10.30 / hour as a minimum wage?  Better yet, instead of legislating a “living” wage, lets institute a “living very comfortably” wage of say $ 200/hour!  The corporate CEO making $500,000 per year still derives no “benefits”, but everybody else whose work is worth less than this new minimum rate will suddenly find himself unemployed and unemployable.  Why is it that at $ 200/ hour the minimum wage is a disaster, but at $5.15/hour it is claimed to be good? Where is the logic?  If it is good at $ 5.15/hour, then what about $ 5.16 /hour?  What is the cut-off point where it goes from good to bad, and what is the logic behind that?

            - Assume the minimum wage goes down to zero (which is identical to no minimum wage at all).  What will happen then?  Initially, absolutely nothing.  The world will not come to an end, and all those currently employed will remain employed.  Some new employment opportunities will be created at lower wages, and, eventually, a new equilibrium will be established, offering more job opportunities, especially for the unskilled laborers, who will then have a sense of self worth and an opportunity to develop skills on the job that will help them move up the ladder.

            Now, which system do you think makes more sense?

            a.         Minimum wage laws make more sense and we should retain them and study ways to improve on them.  This is a Labor of Love.  Employers should love their workers and pay them a "living wage" even if the workers do not generate enough income to justify their pay, and, if employers are not willing to pay more out of love, then we will force them to do it.

            b.         Natural laws of supply and demand make more sense, and we should get government out of the way and eliminate minimum wage laws.  Let’s truly love all our fellow human beings.  Let employers and employees set the wages through negotiating and bargaining, depending upon the competition among employers to keep wages at a fair level. Let’s not enact laws that make it harder on the unskilled, making them unemployable at the government enforced rates.

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