Minimum Wage Laws

 Hot soup on a campfire under the bridge
Shelter line stretchin' 'round the corner
Welcome to the new world order
Families sleepin' in their cars in the Southwest
No home no job no peace no rest
The highway is alive tonight
But nobody's kiddin' nobody about where it goes
I'm sittin' down here in the campfire light
Searchin' for the ghost of Tom Joad
                                           Bruce Springsteen 1995


          In the last five years, the term “living wage” has made its way into the political babbling. It’s generally used to justify minimum wage laws, with the idea being that all people have to be paid enough money for the work they do to live on. This therefore justifies the government involving itself in a financial transaction between employer and employee. The logic of paying someone a living wage at first glance seems compelling: you gotta eat, don't you?  

But dig a little deeper, and the logic breaks down. Let's look at it from both the perspective of the employer and the employee. The goal of businesses is to make money. Therefore almost by definition an employer will never pay an employee an amount of money that will cause him to lose money on the deal. In other words, employees are only hired because they bring more value to the company than what their wages are.  

For example, let's assume that an employer has to pay $10 an hour in wages and taxes to a particular worker. If that worker's labor brings $11 of revenue to the employer, he will hire the person. If that same worker’s labor only brings in $9 of revenue, obviously he won’t get hired; the employer would be losing money every hour.

          Therefore, from the perspective of the employer, he will continuously decrease the amount of employees that he hires as the minimum wage is increased. The federal and state governments can enact all the minimum wage laws they want, but it won’t affect how much value to the company the worker can bring to the table,  With the current federal minimum wage being $7.25, if the employee’s skills are only worth $7 to the employer, he will stay unemployed. 

From the perspective of the employee, I always find these living wage arguments kind of condescending to them. Now granted, the people making minimum wage are on the low and of either skills, education, or brains in our society. Or all three. As a workers’ compensation attorney for almost 20 years, I know these people well. I deal with them every day. But nobody is dumb enough to take a job that doesn't benefit them. If the wages do not provide enough for them to live on, such as for food, shelter, clothing, etc., they simply won't take the job. No one is putting a gun to their head to work for any amount of money. If there were no minimum wage laws an employer would love to offer the employee $1 an hour, as he’d make a lot more money. But the employee won’t take it, because it wouldn’t be worth his time.  

Some of the employees might choose to take a job less than the minimum wage to gain skills in order to later on make more money. Because of the minimum wage laws they don’t have this option. Others might realize that their limited education and skills are such that they cannot bring enough value to a company to justify even getting the minimum wage. Those people will stay unemployed regardless of whether they want to work for less, because of these laws.  The bottom line is, minimum wage laws cost jobs, in a predictable pattern.  

So what do you do for that small minority that genuinely don't have the ability to work? As we said, you gotta eat. Even someone like me, a believer in a radically reduced size of government, thinks we need some limited social programs, such as food stamps. It's much better to have a humane, charitable country that takes care of its poor than it is to distort the laws of classical economics. The latter never works anyway. 

Have a good night everyone. 

JR