All the time people are demanding minimum wage increases. However the idea of a minimum wage being a positive factor in economic growth or social grown is an idealistic one. It is also a barrier to innovation and economic growth. There are so many invalid arguments made in support of minimum wage, and many of them are rather laughable once you start to sit down and think about them logically and most of it has to do with an incorrect notion of the capitalist system based on the situation during the industrial revolution.
False claim of poverty wages
Let’s start with the notion that businesses will pay their employees below a livable wage. What instigated this claim? Well, during the industrial revolution, laborers really were paid quite a small wage for the most part. It was definitely difficult to get buy on such wages. However there were two main reason why businesses were able to pay such horrible wages: there were few industries at the time combined with a small customer base that was comprised primarily of the elites rather than the middle class and because the market dynamics were chaotic at the time, which is is a common situation in emerging markets.
Now however, who makes up the customer base of the average business? It’s the every day middle class American. It’s not the rich who are walking around with cell phones, tablets, mp3 players, and other gadgets, but every day people. It isn’t the rich who are eating at chain restaurants, but rather every day people. If businesses began paying their employees below minimum wage, then they would be depriving their customer base of the revenue needed to purchase their products. Many a small fraction of businesses would give it a shot, but they would quickly fail, and new businesses would take their places.
Walmart: An Excuse
The poor treatment of employees by Walmart, et. al. is often cited as a reason why we need strong minimum wage laws and other employee “protections”, but they are not natural entities in a free market system. The reason why they can get away with what it is doing is because of the support it receives from big government. In fact, pretty much every mega corp like Walmart receives some kind of support or has some kind of connection to the government. If we took away the connection between big business and big government then we would not see the kind of conditions like those that exist at Walmart et al.
Walmart Benefits from Minimum Wage
Indeed minimum wage happens to be one of those benefits. Only corporations like Walmart can easily buffer the cost increases due to rising minimum wages. Smaller businesses are pushed out of the market. Walmart can then increase their prices due to lower competition. In the end, this results in an increased number of people working minimum wage jobs. It also results in the minimum wage having even less purchasing power.
However, minimum wage hikes are not the only government benefits that Walmart receives in the guise of aid for the poor. Food stamps are a major component of Walmart’s net profits. According to the Huffington Post, Walmart receives about $14B through food stamp related sales. Given that their net profits hover around $17B and even taking into account their cost, that is a huge chunk of Walmart’s net profits. Food stamps also give Walmart the ability to continue to pay their employees below living wages. Without food stamps, Walmart would have no choice but to pay their employees more. This is why Walmart supports food stamps and supports having their employees sign up for food stamps.
When businesses are forced to raise wages, they are going to pass those costs on to the consumer as much as possible through price increases. However the cost added to a business does not end with the wage hike itself. Payroll taxes also go up accordingly. While seemingly minimal, the added taxes do increase costs of doing business. This again is passed on to the consumer as much as possible through price increases. This results in absolutely no benefit to the employee or the consumer because the cost of living goes up with how much wages go up. (See also Discussion on Currency and Capitalism)
Unemployment and business failure
As I mentioned earlier, if businesses cannot pass the costs on through price increases, they will fire employees or reduce business. Again, it’s not that businesses are greedy, but rather that they have to take into account increased cost of doing business or risk failing. If a business does not have a buffer, then a miscalculation could mean incurring large debts or bankruptcy.
Of course many people will just contest that it’s the fault of a business for paying an employee minimum wage in the first place. If they didn’t pay minimum wage, then they wouldn’t be affected by minimum wage hikes, right? This is incorrect, entirely wrong in fact. Minimum wage hikes cause wages within a certain distance above minimum wage to increase as well. Let’s say minimum wage is $8/hr and it’s raised to $10/hr.
Well any business paying more than $8/hr, but less than $10/hr will automatically have to raise their wages as well. Not only that, but any job that paid anywhere near $10/hr will have to pay more. Why? It’s because an employee in a semi skilled position making $10+ an hour will not want to be paid the same amount as someone making minimum wage in an unskilled profession.
Citing Other Nations
As with many other debates, Europe is often eyed as an example of why we should or should not implement a given policy. Many Europeans in fact quite pompously claim that they are better than Americans because of high minimum wages. However many of the most successful nations in Europe do not have such laws. Finland, Germany, and Iceland are just a few examples of nations without a legal minimum wage. Instead employers and employees negotiate terms directly.
1. Minimum Wage, Maximum Damage How the Minimum Wage Law Destroys Jobs, Perpetuates Poverty, and Erodes Freedom