The Minimum Wage: the Good, the Bad, and the Alternatives

[morgan_polotan]

Purpose: Explore the costs, benefits, and alternatives of a federally mandated minimum wage.

Definition: A minimum wage is the lowest hourly, daily, or monthly wage employers may legally pay to employees or workers. Equivalently, it is the lowest wage at which workers may sell their labor.

History
The minimum wage was first enacted in New Zealand in 1894 as a means to control proliferation of sweat shops in manufacturing industries that employed large numbers of women and young workers. Today there is minimum wage legislation in more than 90% of all countries. Despite this high adoption rate, there is still much debate as to whether minimum wage law is effective in helping the poor lift themselves out of poverty.

Does It Work?
Up until the mid-1990′s, it was widely accepted by economists that an artificial increase in the minimum wage would simultaneously decrease employment. This can be illustrated by the economic theory of supply and demand, found in any Economics 101 textbook. One textbook states:

“If a higher minimum wage increases the wage rates of unskilled workers above the level that would be established by market forces, the quantity of unskilled workers employed will fall. The minimum wage will price the services of the least productive (and therefore lowest-wage) workers out of the market. … The direct results of minimum wage legislation are clearly mixed. Some workers, most likely those whose previous wages were closest to the minimum, will enjoy higher wages. Others, particularly those with the lowest pre-legislation wage rates, will be unable to find work. They will be pushed into the ranks of the unemployed or out of the labor force.”

This is illustrated by the following diagram:

Economists such as George Stigler and Thomas Sowell both support this assertion that the minimum wage law creates unemployment. Both Stigler and Sowell go even further to say that the harmful effects of the minimum wage law fall disproportionately on low-skilled workers who are forced out of the labor market. Better skilled workers whose market wage is at or near the minimum wage benefit, while workers who cannot demand the federally mandated minimum cannot find work.

Supporters of the minimum wage assert that this supposed inverse relationship between the minimum wage and employment exists in a market with “perfect competition”. In the real world, they claim, the labor market suffers from imperfect competition and that a monopsony develops where there are few buyers (employers) and many sellers (employees). This imbalance of power can cause employees to be paid less than their market value.

They cite asymmetric information and imperfect mobility in the labor market as factors that cause this monopsony. In other words, the employee may have less information on the wages, benefits and availability of other jobs (asymmetric information), and it is proportionally more expensive for the individual employee to transition to a new job than it is for an employer to hire a new worker (imperfect mobility).

What Do The Studies Say?
Actual empirical studies  on the effectiveness of minimum wage laws have been inconclusive. Gramlich (1976) argued that most of the benefit from minimum wage laws went to higher income families, and that low-income teenagers were made worse off. Brown et. al. (1983) also found that there was a 1-3% decrease in employment  every 10% increase in the minimum wage. However, Card and Kreuger studied the 1992 New Jersey minimum wage increase  from $4.25 to $5.05 (an 18.8% increase) by gathering survey data from employers and concluded that in fact employment increased after this period. A subsequent meta-analysis by Neumark and Wascher contradicted the Card & Kreuger conclusion by analyzing 300 studies of minimum wage law from over 50 countries, primarily from the 1990s onward. They found that:

1) studies strongly point to a reduction in employment opportunities for low-skilled workers

2) there is some evidence that minimum wage is harmful to poverty stricken families, and virtually no evidence that it helps impoverished families

3) minimum wage lowers adult wages of young workers who encounter it, by reducing their ultimate level of education

Basically, we’re not sure if the minimum wage law is doing more harm than good.

What Are The Alternatives?
Economist such as Friedrich Hayek and Milton Friedman have supported the idea that instead of a minimum wage there should be a “basic income” given at periodic times to all of a country’s citizens that would be sufficient to cover life’s necessities. They claim this would be more effective than a minimum wage law because it doesn’t impose any costs on employers.

Refundable tax credits are another version of this idea. Unlike the basic income, it does require that a household earn income, but it allows poorer households to reduce their tax liability to below zero, resulting in a tax payment from the government. Ronald Reagan championed these tax credits, and in 2007 the Congressional Budget Office stated that refundable tax credits delivered more monetary benefit to the poor at a lower cost to society.

Basic income and refundable tax credits are both based on a government-backed, compulsory transfer of wealth from the rich to the poor, from the producers to the consumers. I believe that the government use of force should be confined to protecting individual rights. I believe there is a better alternative that rejects the use of force as a means of wealth distribution, and is instead based on voluntary organization and negotiation between the employer and employee. It is called collective bargaining.

Germany, Sweden, Norway, Switzerland, Sweden, and Denmark all use collective bargaining to determine wages and have no federally mandated minimum wage law. The resulting wages negotiated between employers and unions are almost always higher than what the federal government would mandate (the collectively bargained minimum wage in Denmark amounts to $16/hour). In addition, the government would not have to impose legislation that would create costs for employers and result in economic inefficiencies.

I can draw upon my personal experience as an actor in the entertainment industry as evidence of the benefits unions can have for their members. Many unions exist in Hollywood, including the Screen Actors Guild (SAG), the Directors Guild of America (DGA) and the Writers Guild of America (WGA). As an example of the benefits collective bargaining can bestow upon the labor force, let us look at the differences in pay between union and non-union movie extras, covered by SAG.

SAG movie extras are paid $144 for 8 hours plus overtime, whereas non-union movie extras are paid only $64 for 8 hours plus overtime. SAG members also enjoy better overtime wages and can qualify for benefits like pension plans, health insurance and unemployment insurance once they reach a certain annual income. The collective bargaining power of SAG smooths out the market inefficiencies of asymmetric information and imperfect mobility, resulting in wages closer to their market value; without the costs associated with government meddling in the labor market.

In collective bargaining, both parties maintain their freedom to choose. Employees can choose to join the union or not, and employers can choose to hire union workers or not.There is a definite cost-benefit analysis to be made for either decision, and it is my belief that analysis should be left up to the parties involved, not the federal government.

Conclusion
In conclusion, I have examined the history of the minimum wage law, as well as arguments for and against its effectiveness. I have considered the alternatives to the minimum wage, including the basic income and refundable tax credits. I have proposed that collective bargaining is an alternative that maintains an individuals freedom to choose, and avoids the use of force by the government.

Cross post