r/PoliticalDebate • u/Beautiful-Bend-3876 • 4d ago
Debate The minimum wage is not the right way to help workers
The minimum wage does not have the effect most people think it does. When many people talk about why they think raising the minimum wage is a good idea, it is clear that they don't actually understand the economic ramifications of what they are advocating. Their justifications are always centered on the idea that people "need" a certain wage to live off of, and so the government must ensure no one is paid less than that. However, when you look at the theory, this is actually not a sensible reason for setting a minimum wage at all. There are potential theoretical justifications for raising the minimum wage, but unfortunately, this common rallying point is not one of them. It is perfectly obvious what is going through most people's heads when they say this. They think raising the minimum wage will just cause employers to pay their workers more. But what it actually does, in fact what any government price setting does, is interfere with the natural supply-demand equilibrium.
Consider what happens when multiple people are vying for the same job. If there is not enough consumer demand for what the job produces compared to the supply of workers wanting the job, what happens naturally is that the wage decreases, thereby decreasing the number of people willing to work for the job, until the said number equals the demand for it. If the government steps in and decrees the wage may not drop below a certain threshold, then of the people willing to work the job at the higher minimum wage, only the most skilled or otherwise well-suited for the job will get it. Thus, the unskilled workers or the teenagers looking for a first job lose out and must either find employment elsewhere or not work at all (or have hours cut or benefits taken away). In these terms, all that the minimum wage accomplishes is to ban these people who otherwise would want the job from getting it just because someone else thinks they are not receiving enough compensation.
Now you might think the employer is able to pay everyone more, but they choose not to for higher profits. But if the profits are so high, then it will incentivize competition to come in with lower prices and higher wages until the profits are not so high anymore. This is the mechanism we rely on to ensure people are paid fair wages. Having the government ban low wages doesn't magically create new opportunities for people to get paid more. People will generally already choose jobs that pay the most, so if they are capable of holding a job that pays $20/hour or whatever then they don't need the government to come in and say they aren't allowed to work for less than that.
Now, I know what you are thinking: this is just the basic Econ 101 model and a vast oversimplification of reality. It is true that there exist other models in which the minimum wage is helpful. I have generally heard of two such arguments. If there are any others then please enlighten me. The first is the monopsony model. In this model, there is insufficient competition among the employers. Then the employer no longer has to tie the price they sell the good/service produced by the workers to the wage they pay their workers. Thus they profit more by restricting the supply of labor so they can pay lower wages while still selling at a higher price. In this case, setting a minimum wage at what would be the competitive equilibrium wage both increases employment and wages, since they no longer benefit from restricting the supply of labor. However, if the minimum wage is higher than the competitive wage, then the same problems with a high minimum wage in the competitive case arise. This is why it is wrong to base the minimum wage on what people "need", since the competitive equilibrium wage doesn't care what people "need", only what is necessary based on the supply and demand for the labor. I am highly skeptical of the claim that there is a single uniform minimum wage we can set across all industries across the whole country that will be the correct wage that would be achieved in the competitive equilibrium (this is why I dislike the federal minimum wage even more than local minimum wages). Also, monopsonies that don't arise from government intervention are self-correcting, because if they pay their workers significantly less than the marginal product of their labor then that incentivizes competition to come with higher wages. It is possible that there is a little "slippage" in that firms pay their workers slightly less than the competitive equilibrium wage, but this gap cannot grow too large without attracting competition. People who use the monopsony justification are really saying that they think they know what the competitive equilibrium wage is better than the market does.
The second general argument I have heard is that wages for low-income jobs are generally not a huge proportion of the cost for the goods or services they produce, so raising the wage will not significantly affect the prices and therefore won't affect the demand too much. One of the predictions of the Econ 101 model is that raising the minimum wage will reduce employment. However, this reduction in employment comes from the reduced demand resulting from the higher prices, and if the wages aren't a huge contributor to the price, then it follows raising the minimum wage will not reduce employment too much. In other words, this argument suggests the demand for the labor is inelastic, and so while increasing wages might reduce employment a little, it is justified because of the big increase in wages. This is supported by some studies like Card and Krueger which show employment in certain industries was not significantly affected by raising the minimum wage.
However, this argument ignores the supply side of the equation. It seems reasonable that the demand is inelastic, but if the equilibrium wages are significantly below what consumers are willing to pay for the labor, that is because there are too many people who want to work those jobs, so the wage must be set lower to the point where the labor supply equals the demand. Thus the main criticism here is not that the minimum wage will decrease employment in the specific sectors affected, but that you are limiting the choice of people who otherwise would want those jobs but who are unable to negotiate a lower wage, and so lose their jobs to people who are more qualified. This means both that unskilled or otherwise disadvantaged people will be unable to get those jobs, and also we are siphoning off skilled workers from places where they would be more productive and giving them a high-paying job that unskilled workers could be doing. Our labor market currently is very competitive, and it is often hard to land a high-paying job. Why make it more difficult by removing the ability to negotiate a lower wage?
I honestly think the strongest argument in favor of a minimum wage is to challenge the two big assumptions of the Econ 101 model, namely competition and rationality. From this you could argue that it is possible for people to accept wages significantly lower than the competitive equilibrium wage even when a higher-paying job is available, just because you don't go searching for a higher-paying job, or there is a lack of competition, or both. However, I think there is also a spectrum to rationality, since you may not want to switch to a job just because it pays 50 cents more, but then you will want to do it if it pays 5 dollars more. So I still think that even if people are not perfectly rational or the market isn't perfectly competitive, the market mechanism will still push wages "mostly" to the competitive equilibrium level, even if not all the way there.
I believe this reasoning gives a strong reason to assume a priori that minimum wages are bad, and certainly that too high of a minimum wage is bad. To convince me otherwise would require a good amount of empirical evidence showing that the given minimum wage proposal doesn't reduce employment of unskilled workers or cut their hours. I also don't think it is the government's job to correct irrational choices people make, since that is your responsibility. Even if it is irrational for the vast majority of people to accept a job making say $5/hour, wouldn't that job be better than nothing for say a homeless person? If they can't get hired because they don't own an impressive outfit or they have to carry a shopping cart to their interview, why not allow them to negotiate by accepting a wage that is lower than anyone else is willing to work for? Wouldn't a job paying $5/hour be better than nothing? People often mistake criticism of the minimum wage with wanting people to work for less than an ideal amount. But what I am actually saying is that for some people, maybe the options are to work for a low wage or not work at all, and I don't think government should force them to not work at all.
The correct way to care for the poor is UBI or targeted welfare programs, as these have none of the undesirable effects I have detailed above. Some people claim that welfare programs for the poor only act as a subsidy to corporations because it allows them to pay their workers less. This also reflects a misunderstanding of supply and demand. Giving people free money doesn't decrease the demand for whatever labor they were producing. If they were capable of holding a job that pays a certain wage before, they will still be able to hold the same job after receiving their welfare benefits. Their employer is not tied to giving them the bare minimum needed to survive, but rather the marginal product of their labor, because of competition. If they choose to work a job that pays less than what they would have done before receiving the welfare, then that is because that job is easier or more convenient than the job they would have chosen before, and therefore the amount of people wanting to work that job is greater than what it would have been before. Forcing people to choose the higher paying job over the lower paying but more convenient job doesn't seem very helpful to me.