By Rachel Witherspoon
Let's begin with a basic statement: everyone in America deserves a living wage if they work for it.
A key difference exists in the way in which Americans are provided with that wage. Many falsely believe the only way to ensure Americans are able to receive a fair wage is if the government mandates it through a minimum wage. The brutal fact of the matter is that the markets can determine a fair wage rate far better than the government can.
This sounds harsh and absurd, but I assure you it is absolutely no more absurd than the government applying an arbitrary minimum wage rate across completely unrelated sectors.
Consider for a moment that there are three companies that hire employees to do the exact same job.
In Scenario 1, there is a minimum wage at $7 and thus each of the three companies hire their employees at the exact same wage of $7.
In Scenario 2, there is no minimum wage but due to the supply of labor and marginal revenue productivity, the market’s natural wage rate is $9. Company A wants to ensure they are able to hire the most hardworking workers, so they hire their employees starting at $12 an hour. Company C also wants dedicated workers so they offer their employees a starting rate of $11 an hour with the addition of overtime and benefits. Company B feels the need to compete with the other companies in the market for employees, but they are just starting out and do not have as much capital to spend. Therefore, Company B offers their employees $9 an hour along with generous stock options and significant opportunity for upward mobility.
Whereas in Scenario 1, there was a minimum wage that effectively allowed companies to hire by colluding on their pitch to employees, Scenario 2 forced Companies A, C, and B to provide competitive employment options to potential employees.
Creating an environment for employers to compete for their employees through competitive pay and benefits is an important aspect of the market often undercut by the minimum wage. However, it is just one example of how detrimental the minimum wage can be and how the market can better serve Americans.
Perhaps far more detrimental is the number of low skilled workers the minimum wage cuts out of the workforce. In fact, the minimum wage was originally designed to do exactly that, cut low skilled workers out of the workforce and ensure jobs went to people of a more desirable class. 1 Facing this fact is difficult so I will dedicate a separate article to fully examine how the ideas of racism and eugenics led to the first minimum wage laws in America.
Nonetheless, even today, more people are cut out of the workforce as the minimum wage is increased. This disproportionately affects low skilled, young, and minority workers. Employers prefer to hire employees with more experience and skill when having to pay a higher wage. This often cause employers to either cut down on employees by forcing remaining employees to increase their workload, which they justify by saying they now have a higher wage, or moving towards cheaper and more dependable automation. 2
As Preston Cooper at the Foundation for Economic Education says, “The largest cause of poverty is not low wages but lack of work altogether”. 3 Cooper presents an increasingly important point. Afterall, socialist ideas and programs may sound good, but they are just primrose paths waiting for willing victims.
About Rachel Witherspoon
Rachel Witherspoon is a young American graduate student with a passion for utilizing the knowledge found in economics, business, and political science to help others. She is a fierce advocate for America and an even bigger advocate for the First Amendment.