Minimum Wage

Certainly everyone would agree that it'd be ideal if all jobs paid well enough for employees to live comfortably. However, this article does to provide any normative content. That is to say, this article is not concerned with how the world should be. Rather, it's a discussion of how profit maximizing organizations tend to behave and what market behaviors we would expect to observe with an increase to the minimum wage.

Why increase the minimum wage?

Perhaps the most compelling reason to raise the minimum wage is that if there are workers who don't have many options for employment, then employers could underpay a class of worker. What I mean by underpay is setting wages for a employee far below the value they bring to the company.

Traditional economics argues that if a worker is underpaid in a position, then she should be able to find a comparable position at another company that is willing to pay more because the value the employee brings is still greater than the dollar amount being paid the worker. (If employees are more expensive than their value, the organization will eventually wise-up and terminate the employment.)

In some cases, companies can take advantage of a desperate class of workers who are unable to negotiate fair wages for themselves. This is the equivalent of price fixing but instead of raising the price for a good or service, an industry can push wages down for a particular subset of workers.

Seattle's raising of the minimum wage.

Seattle is well known for being progressive and trying to strengthen living standards for low-skill workers by forcing a high minimum wage and forcing employers to provide certain benefits to full-time employees. Theses efforts have largely been ineffective and perhaps even damaging to the group of people they've been trying to help.

Consider a McDonald's employee taking orders for customers at a cost of $9.25 an hour in Seattle. This employee may feel underpaid and be struggling to make ends meet. Policy makers, wanting a livable minimum wage for such employees, decide to force an increase in minimum wage for $9.25 to $15.

If employers a profit maximizing, common sense holds that this employee will only be able to retain there job if they (1) provide at least $15 an hour in service and (2) there are no cheaper alternatives available to the employer.

If (1) is true while (2) is not, raising the minimum wage can be beneficial to these employees without bringing financial distress to a business.

Regardless of whether (1) is true, if (2) is true then raising the minimum wage beyond the threshold of alternatives leads to unemployment of these workers. This is precisely what happened in Seattle. Many jobs were replaced by machines because installation and maintenance of the machines became less expensive than keeping employees.

Finally, if neither (1) or (2) are true than this job has been eliminated from the market because the employer can't make ends meet.

Is there a way forward?

It's becoming increasing difficult for low-skill workers to receive livable wages due to advances in technology that automate jobs. This is not the first time workers have been driven out of their jobs. In 1900, 40% of the U.S. population lived on farms. Now it's only 1.3%. All the would-be farmers had to find a different occupation and many of us have successfully done so!

Unfortunately, expecting low-skill workers to be able to always find employment in a continuously automated world isn't a reasonable expectation to have for most people. This discussion discussion and this chart show that about 6.4% of the population is cognitively impaired which probably implies that about 6.4% of the population isn't eligible for meaningful employment.

While those of us who are capable of finding permanent employment that pays comfortably have probably worked hard and been quite intentional about putting ourselves in this position, frankly it's not much of an option for a considerable portion of the U.S. and simply beyond the biological ability of some people.

What can we do to help these people?