The Minimum Wage Law - Essay Example

Mohammad Alwazan Public Policy and Economics Problems The Minimum Wage Law Introduction and Nature of the Minimum Wage Policy The Minimum Wage Law is an issue that defines the line between the conservative/liberal economic ideology and boss/worker relationship. The subject evokes strong emotions on each side of the political and social divide producing contentious, seemingly irresolvable debates. Since its enactment 71-years ago, effects of the law have yielded conflicting results. This circumstance has resulted in a polarization of opinion between economists, politicians, employers, social activists and the general public as well. Legislators passed this depression-era law with the promise of creating a minimum standard of living for workers and their families. Their intent was to establish a national minimum standard of living and stabilize the economy by regulating pay of the poorest social class. The outcomes from this grand experiment are varied. Social activists maintain that it prevents greedy businesses and heartless corporations from exploiting the lowest wage earners. Economists hypothesize that it may actually reduce employment and deepen the wounds of poverty. Politicians seek to justify the law to constituent consumers and small business owners (many of whom pay must pay part-time workers above their market value). This paper will examine issues surrounding the Minimum Wage Law to determine the best approach for assuring low-end wage earners survive in a free-market society. Minimum wages ability to strengthen the economy remains subject to intense analysis and research. Legislators intend the law to provide workers and their families with a livable wage, yet many question whether it achieves that or whether it fits into our free market society. The New Deal and its associated recovery programs were viewed by some as "a drastic control of capitalist exploitation, involving a socially planned economy in which the depersonalized pursuit of private profit is subject to check at a thousand strategic points" (MacIver 836). In spite of these goals, traditional capitalists contend that the law contributes to inflation, creates unemployment, and harms small businesses. Some go so far as to call it unconstitutional and counter to the spirit of free market economics. Regardless of whether minimum wage fits into our free market ideology, leaders have an obligation to implement policies that offer significant overall benefits to the good of its citizens, especially those in the most need. This leads to three questions about regulating base pay: First, is it necessary to alleviate suffering, hunger, or inhumane hardship? Second, is there a significant economic reward gained by the employing individuals at a minimum cost? Third, can the same outcome be reached by a method that is less intrusive and coercive? This research will establish that minimum wage offers little economic reward, is overly coercive, and may in fact be a net negative gain for all the stakeholders involved. Relevant Philosophical and Constitutional Issues The federal law regulating base pay began as part of the Fair Labor Standards Act in 1938; however the concept finds its roots in state laws aimed at improving standards of living. The trend quickly took hold. By 1924, eleven states had passed minimum wage legislation. Even today, states continue to set a base income above the federal standard of $6.55. In spite of these initiatives, the regulation of wages experiences mixed reviews. Some argue that the laws violate the Fourteenth Amendment by interfering with the "right to the acquisition of property" as well as the "freedom of contract of both employer and employee" (The Legislative Minimum Wage 1015). Social liberals, unions, and poverty-focused organizations generally favor the stronger versions of this law while businesses and political conservatives typically oppose the government interference in the economy. Part of both the controversy and intrigue of minimum wage is that it runs counter to the current of our free market society. Few other commodities remain as regulated as the market for labor. For example, while government may grant agricultural subsidies during unfavorable years, most are viewed as barriers to free trade. In general, economists regard the government subsidy of business as an unfair practice in todays global marketplace. Economists also argue that subsidies exploit the consumers’ buying power while giving incentives for the producer not to produce instead of submitting them to free market influences which would drive consumer costs down. Regulating wages on an ‘across-the-board’ basis takes away the flexibility to control all expenses which businesses must have to compete on a global scale. Employers are forced to subsidize employees with standardize wages often find themselves at a disadvantage against other competing global regions which are not burdened by government interference. This restriction on corporate freedom even damages worker rights. William Howard Taft once wrote that "Legislatures in limiting freedom by contract between employee and employer by a minimum wage law proceed on the assumption that employees, in the class receiving least pay, are not upon a full level of equality of choice with their employer and in their necessitous circumstances are prone to accept pretty much anything that is offered" (qtd. in Woloch 163). The worker who wishes to bargain for his own labor remains unable to do because restrictions are already in place. Put differently, a basic problem with the minimum wage is that it applies to everyone indiscriminately regardless of individual situations. While pay regulation intends to instill fairness in worker/employer negotiations, the law seems to have the opposite effect. The Economic Reasoning and Effects of the Minimum Wage A critical question surrounding minimum wage is whether or not it discourages employers from hiring low level and unskilled workers. The basic law of free market economics states that "a price artificially raised tends to cause more to be supplied and less to be demanded than when prices are left to be determined by supply and demand in a free market" (Sowell 163). A higher base pay will attract more workers that may otherwise choose not to work; however, the increase in the number of employed will generally be a not be a family’s core wage earner or the family’s base income source. In spite of expectations, these workers typically consist of people seeking a second job, summer employment, or part-time work. From an economic standpoint, a business cannot remain in business if it is forced to pay wage rates above what employees return in revenue. According to Sowell, "Making it illegal to pay less than a given amount does not make a workers productivity worth that amount – and, if it is not, that worker is unlikely to be employed" (Sowell 163-164). The employer becomes forced to either lay someone off or reduce the wages of other workers to subsidize the minimum wage earner. The debate surrounding base pay regulation has intensified amid the current climate of battling unemployment, fighting inflation, and resuscitating small businesses. The minimum wage is set to increase again on July 24, 2009 to $7.25, a $2.10 increase affecting 12.5 million workers (Fox 1). Supporters claim that this remains insufficient and have called for steeper rises in the pay scale of the lowest paid workers. In 2004, Democrats in the US Senate favored wage hikes proclaimed, "Low-income workers have faced greater poverty and even growing hunger, while corporations and wealthy Americans reaped the benefits of multiple tax breaks and saw profits soar" (Minimum Wage). Critics of the increase counter that most minimum wage earners are part-time workers, new entrants, and middle-class teenagers working summer jobs to earn some extra spending money. (Even and Macpherson ii). Because of the minimum wage the income ratio of the family man full-time worker and the part-time teen are close to the same though the teen has a lower value in the free labor market. As a result, the full time employee remains disproportionately poor in relation to other workers and to his/her worth to the economy. Additionally, businesses bear an additional $50 billion per year in labor costs due to the minimum wage law, money it could have used to expand and hire other employees. This intense debate rages on as economists, politicians and advocacy groups spin the statistics to support their personal views. Literature Review Critics of the minimum wage law often fault it for being unjustly representative and re-distributive. Businesses are handed the burden of fighting poverty with their limited resources; however, unlike typical class struggles, the strongest advocates of the law are not the poor. Michael Hayes surprisingly reports, "the more a proposed redistribution stands to benefit people at the bottom of the income ladder [...] the more likely it becomes that the potential beneficiaries will fail to mobilize at all" (466). For example, minimum wage typically remains fairly stagnant over long periods, in spite of inflation and widening gaps between the rich and poor. It is only periodically when the labor unions get involved that "the minimum wage issue is incorporated into the ongoing struggle between labor and business over shares of national income" (Hayes 470). By this measure, regulated income increases do not emerge from "rational economic objectives” but simply reflect “changes in the relative power of business and labor" (Hayes 470). There is no consideration for the net income gain for the workers, either individually or as an aggregate group. Neumark and Wascher argue that "wages rise for those who remain employed, but employment and hours decline, resulting in a net negative overall effect of the minimum wage on labor income among these individuals" (87). Thus mandatory pay increases actually increase unemployment, which ultimately leaves the poor with a net loss of income. Neumark, Schweitzer, and Wascher further state that “hour reductions among employed workers that, coupled with small disemployment effects, generate net losses in earned income" (449). The high cost of benefits for full-time workers also factors into the wage shifts. If businesses utilize a large unskilled workforce, they will only continue hiring employees until the workers marginal revenue matches the marginal labor cost for those employees (wages plus benefits). When the minimum wage increases, the marginal labor cost rises and the employer must either "reduce employment until marginal worker productivity is increased by a sufficient amount, or reduce the non-wage part of compensation" (Simon and Kaestner 54). A Simon and Kaestner study reveals that fringe benefits were not cut when minimum wages were increased. This includes "the receipt of health insurance, ...whether the employer paid the whole premium cost, ... whether family health insurance was provided, and ...receipt of employer pensions" (67). The only alternative remaining for the employer is to reduce the workforce size to bring the labor cost back into equilibrium. In their comprehensive study, Neumark and Wascher collaborate this finding. In spite of claims to the contrary, they reveal that "the preponderance of the evidence points to disemployment effects" (163). Employers will act out of economic necessity, and cost cuts will, in all likelihood, be at the expense of the minimum wage earner. Studies further conclude that workforce reduction and the resulting unemployment emerge gradually rather than as an initial spike. According to Neumark and Wascher, "there is substantial empirical evidence that the disemployment effect of an increase in the minimum wage may occur with a lag of one year or more" (35). This trend results in eventual cutbacks as hours are reduced and workers are moved from full-time to part-time. Research confirms that "minimum wages reduce full-time employment and increase part-time employment of teenagers and adult males" (Neumark, Schweitzer, and Wascher 428). This reflects earlier research by Neumark et al. in 1998 that reported "minimum wage increases had beneficial effects on low-income families contemporaneously, but adverse effects after one year" (Neumark, Schweitzer, and Wascher 432). Thus, the true effects of wage regulations unravel amid long term and ongoing research Another unintended consequence of minimum wage is that it reduces the significance of pay in defining a job. Higher paying jobs contain certain expectations based on the level of pay. For example, a professor is paid differently based on his/her degree, and a manager is paid differently based on his/her responsibilities. However, minimum wage laws group together low skilled and low wage jobs indiscriminately. Put differently, laborers become treated as expendable or interchangeable. One sees this in how many businesses deal with increased pay. While many choose layoffs, a study in the UK reports that "the most notable adjustments made by employers centered on efforts to increase the number of tasks workers were expected to undertake and the number of machines they were expected to mind. Reductions in overtime working were also in evidence" (Heyes and Gray 211) In addition, Heyes and Gray also noted that "employers had responded by increasing discipline, dismissing (or threatening to dismiss) poor performers and intensifying work effort" (212). They are losing hours and overtime, while being worked harder and existing under the tension of threatening conditions. Seen this way, minimum wage law hits workers from many sides. Aside from creating unemployment, reducing hours, and under-employing workers, minimum wage leaves unskilled workers with a poor employment outlook. It is a double-edged sword. Raising the minimum wage has been shown to reduce the labor demand of employers. At the same time, because more workers are attracted to these higher waged jobs, there is an increase in supply. As the pay regulations take effect or increase, the lowest skilled workers initially benefit, but over time they become unable to compete with higher skilled workers seeking the same jobs. (Neumark and Wascher 91) The irony is that both businesses and workers remain limited by law in what they can negotiate. "Some unemployed workers would gladly work for a lower wage but cannot find a job, and some employers would be happy to hire workers at a lower wage but the law forbids it" (Rocheteau and Tasci 2). If an agreement between the employer and the worker cannot be negotiated, the unskilled worker most likely will remain unemployed. The workers inability to take a job for a pay that they would otherwise accept pulls money out of the poorest class, reducing the strength of the overall economy. This redistribution of wealth ultimately extracts from the lower class yet does not recirculate to the upper classes. It, in effect, is dead wood that contributes nothing to the growth of the economy. Wage regulations ultimately do little to elevate the unskilled and uneducated worker out of poverty. According to Sowell, "minimum wage laws are almost always discussed politically in terms of the benefits they supposedly confer on workers receiving those wages" (163). Ironically, as has been demonstrated, the minimum wage law reduces employment and reduces the income available to the poverty class. In essence, the measure functions as a reverse welfare program where money is extracted from the poor and left on the table. Low paying jobs have traditionally been the first stepping stone towards higher paying work; however, when the escalating base pay eliminates these positions, workers have few entry points left into the employment. According to Bartlett, "low-pay jobs are the first rung on the economic ladder of success for workers entering the labor force. When we cut off the bottom rung by increasing the minimum wage, we keep youngsters from making the transition to work" (9). These youthful workers that are denied employment will by necessity become a burden on the economic system in some capacity. Conservative opponents often cite the fear of inflation as a reason to abolish the minimum wage law. Inflation usually results from an increase in production cost, shortage of a product, or growth of demand. Pay regulations usually have this effect. For example, opponents contend that the raising the cost of labor would add significantly to the price of goods that would be passed along to the consumer. Proponents usually counter that the higher wages result in more disposable income, which in turn creates a higher demand for products thus fueling the economy. This may be true, but this increase is more than countered when lower employment rates and shorter work hours are taken into account. According to Liana Fox, the added cost of labor for the estimated 12.5 million people earning minimum wage would be $50 billion if they were given a $2 per hour raise, and while not insignificant, represents only four tenths of a percent of the gross domestic product (Fox 1; Gross Domestic Product: Fourth Quarter 2008). To be fair, there is not a direct correlation between the .4 percent of GDP and the rate of inflation; however, that may simply indicate that the US economy is robust enough to absorb the increased price with minimal impact. Supporters of a higher base pay have contended that raising wages of the working poor puts more money into the economic system and is actually a net plus for the system. A low paid worker who suddenly gets a $1 per hour raise will spend the all the extra money because they can’t afford to save it. Putting more money in the hands of the poor always acts to stimulate for the local economy. Businesses will do better as a result of the extra spending which will theoretically more than offset the higher wages that they pay. While this optimistic outlook would be true if all other things remained equal, this very simplistic scenario simply would not play-out in this neatly packaged manner. As has been shown, the benefits are offset by several consequences. Workers are tasked with higher productivity, tension in the workplace, and shorter hours. The increase in stress could potentially be associated with future health problems. These all result in increased costs to the individual and society. Conclusion The minimum wage is well intended and at first glance the social activist’s argument seems rational and compassionate but this intrusive law is burdened with severe and negative consequences for employers, the economy and workers themselves. For political conservatives, regulating base pay contradicts fundamental beliefs in the capitalist ideology. For economists, wage restrictions violate the basic laws of supply and demand, a circumstance that could only slow the economy. Despite all evidence to the contrary enough people still believe a minimum wage is beneficial which enables this detrimental American tradition to remain intact. Legislators routinely increase workers pay to satisfy their constituents. Even with the apparent lack of merit, minimum wage bills routinely find enough support to pass both at the state and federal level. Ironically, the measure is not mobilized by the lower classes or those who stand the most to gain in this apparent class struggle. Rather, it is the labor unions that provide the necessary political impetus to sustain their skewed characterization of the minimum wage. The conflict over the minimum wage is a struggle between labor and management without any regard for rational economics or the subsequent negative effects to the working class that it exists to serve. The minimum wage law ultimately extracts wealth from the lower classes by a variety of methods. It results in higher unemployment due to employers being forced to lay-off workers in a desperate attempt to compensate for increased labor costs. Employees are burdened with shorter hours, less overtime, higher production demands, and increased disciplinary measures. Worst of all, the wealth extracted from the lower classes is not redistributed. It is pulled out of the economy and remains dead wood. The terrible irony is a federally mandated wage level does not raise families out of poverty. An alternative to a minimum wage is to augment the Earned Income Credit (EIC), a program already in use. This tax credit formula mediates the distribution of wealth by rewarding the main family wage earner. Under this program, the more a worker earns, the more EIC they are awarded. After a point, the tax credit begins to diminish eventually lowering to zero. A worker with a family can get a significant raise but only if they are a member of the working poor. Because it is a tax credit, it does not involve employers or labor costs. Apparently the minimum wage is here to stay. Of course bad choices carry consequences. Burdened with an ever-increasing pay rate, government leaders have two choices, both bad, to freeze the current rate or expand the wage scale. Either way, the working poor face a reduction of real income, their meager income will buy less and less over time. The only reasonable long-term solution is for workers to negotiate wages on an individual basis, a genuine free-market concept. This process fits in well with our capital-based free-market system but would require both employee and employer to accept personal responsibility. Workers would manage their own business affairs and corporations would treat workers fairly. Of course as recent and not so recent news stories have demonstrated, corporate responsibility and prudence have been noticeably scarce in todays free markets. Yet, without these virtues, the poor will become poorer and businesses will struggle to stay open. Only when we as a society accept social and individual responsibility that the benefits of capitalism places upon us will we resolve the paradox of the minimum wage law. Works Cited Bartlett, Bruce. "Minimum Wage Is Bad Policy." Human Events 14 Feb. 2005: 9. Even, William E., and David A. Macpherson. Wage Growth Among Minimum Wage Workers. Washington, DC: Employment Policies Institute, 2004. 1-18. Fox, Liana. "What a New Federal Minimum Wage Means for the States." Economic Policy Institute Issue Brief 234 1 June 2007: 1-2. "Gross Domestic Product: Fourth Quarter 2008." "Gross Domestic Product: Fourth Quarter 2008" Bureau of Economic Analysis. 26 Mar. 2009. US Department of Commerce. 16 Apr. 2009 . Hayes, Michael T. "Policy Characteristics, Patterns of Politics, and the Minimum Wage: Toward a Typology of Redistributive Policies." The Policy Studies Journal 35.3 (2007): 465-80. Heyes, Jason, and Alex Gray. "Small Firms and the National Minimum Wage." Policy Studies Journal 25.3 (2004): 209-25. MacIver, R M. "Social Philosophy." The American Journal of Sociology 39.6 (1934): 835-41. "Minimum Wage." "Democratic Staff of the Committee on Health, Education, Labor and Pensions Committee United States Senate" Almanac of Policy Issues. 1 July 2004. US Senate. 16 Apr. 2009 . Neumark, David, and William L. Wascher. "Minimum Wages and Employment." Foundations and Trends in Microeconomics 3.1-2 (2007): 1-182. Neumark, David, Mark Schweitzer, and William Wascher. "Minimum Wage Effects throughout the Wage Distribution." The Journal of Human Resources 39.2 (2004): 425-50. Rocheteau, Guillaume, and Murat Tasci. The Minimum Wage and the Labor Market. Cleveland, OH: Federal Reserve Bank of Cleveland, 2007. Simon, Kosali I., and Robert Kaestner. "Do Minimum Wages Affect Non-Wage Job Attributes? Evidence on Fringe Benefits." Industrial and Labor Relations Review 58.1 (2004): 52-70. Sowell, Thomas. Basic Economics: A Citizens Guide to the Economy. Cambridge, MA: Basic Books, 2004. "The Legislative Minimum Wage." Harvard Law Review 31.7 (1924): 1013-17. Woloch, Nancy. Muller v, Oregon: A Brief History. Boston: Bedford St. Martins, MA. Read More