The Importance of Setting a Minimum Price Level in the Labor Market

Two primary categories of argumentation in favor of minimum wage exist today: a rights-based argument, which views minimum wage laws as an issue of human rights; and an argument based on favorable outcomes, which justifies an increase in the minimum wage because of the potential positive effects on the economy and society. Both arguments seek to provide a rationale to defend an increase in the minimum wage, on both federal and state levels. An analysis of each of these approaches to minimum wage as well as the primary policy alternatives reveals the problems of minimum wage and the complexity of economic reform.
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The rights-based argument claims minimum wage to be an ethical problem, referring to it as “a critical civil and human rights issue” (NASW, 2014, p. 2). Accordingly, advocates of this position consider wage inequality and, specifically, low wages to be a threat to society and democracy because it prevents certain segments of the population from acquiring basic needs, including housing and food, which in turn limits the scope of democracy by reducing the level of social inclusion. Due to its theoretical structure, the rights-based argument cannot be empirically tested; it is a matter of philosophical debate. Historically, the concept of human rights, articulated in political and economic policy, was not fully developed until the eighteenth century, and even then it was constantly evolving. Hitherto the modern age, the state was not considered the primary agent in the preservation and enlargement of human rights. Rather, the Church was chiefly responsible for welfare throughout society and capitalism served as the primary source for welfare funding (Levy, 2017; Neal, 2014).
The concepts of natural rights and human dignity have existed since antiquity, but due to the rampant political and economic instability, those virtues were best preserved and maintained by apolitical institutions like the Church. From 1789 to 1930, the government of the United States was limited in scope, economic and social issues were primarily under the control of state and local government. Thus, the economy operated on the principle of laissez-faire and the social reform, such as temperance and working conditions, were carried out by the private sector and labor unions, which did not directly coordinate with the government to accomplish their goals. The result was unprecedented economic expansion and social change. Yet, despite economic growth and social reform during the nineteenth century, the federal government did not increase in size and federal receipts, outlays, and surpluses remained constant (Mill, 2008; Neal, 2014; OMB, 2018; Shankman, 2017).
The Great Depression precipitated significant transformation as President Franklin Roosevelt instituted extensive reform via the New Deal programs. These programs exponentially increased federal expenditures and created an expansive welfare system, the Social Security Act of 1935. However, his reforms did not successfully end the Depression, which would last until 1939, the beginning of World War II (Quadagno, 1984). Most modern welfare institutions, however, began with President Johnson’s “War on Poverty”, which was part of his Great Society program. Statistically, the poverty rate in the United States had dropped from twenty two percent to fifteen percent between 1959 and 1965. Once Johnson’s reforms were instituted, the poverty rate fell another three percent and it has fluctuated between twelve and fifteen percent since the late 1960s, even though the United States is now significantly more prosperous overall (Richards, 2010).
The Constitution grants the federal government with the power necessary and proper to execute the expressed powers, but the extent of those implied powers has always been a point of contention and debate. The Founders believed in the natural rights of man and, consequently, advocates of the rights-based argument claim that society has a moral imperative to aid anyone in need and they believe the government to be the most capable agent to fulfill this obligation. Roosevelt’s presidency was the beginning of a cultural shift regarding individual natural rights. The Great Depression was considered proof of a flawed economic system and was the catalyst for welfare support from the federal government. The emphasis on human suffering was reinforced during the Second World War, thus, providing the moral dimension to the argument for government mandated minimum wage (Beeman, 2010; Richards, 2010).
The second type of argument focuses on the potential economic outcomes associated with higher minimum wage laws. Possible positive outcomes linked to the minimum wage include higher wages and earnings for all socio-economic classes, less overall poverty, a reduction in wage inequality, a lower unemployment rate, reduced inflation rates, and greater economic growth, in terms of real GDP and GDP per capita. Hypothesized negative effects include lower hiring rates, particularly for the disadvantaged and low-skilled laborers, stagnant or higher unemployment rates, and slower economic growth. All of these claims are subject to empirical analysis and, as such, is the primary area of active research and debate among economists today (Belman & Wolfson, 2014; Romich, 2017).
The available literature cautions against significant increases in minimum wage. The data suggests that modest increases will result in, at best, nominal income gains and small negligible impacts on employment. Numerous studies, such as those conducted by Romich (2017), Sauer (2018), Pascal (2017), Lopresti & Mumford (2016), and Clemens & Strain (2018) detail the potential general benefits of increasing minimum wage, but caution against increasing it too much. Unfortunately, there is no standard rate that maximizes the benefits of minimum wage and so, each state and market must determine the advantageous rate individually, which could result in miscalculations.
Additionally, the market is dynamic and no single minimum wage will suffice long-term. The fluctuations require constant recalculation and readjustment of the minimum wage, which implies both an increase and decrease in minimum wage contingent on the varied market factors at the time. The ever changing nature of the proper, economically beneficial minimum wage would have significant impact on the workforce, especially the low-skilled workers, whose wages, being bound to the minimum wage, would increase and decrease from year to year. Additionally, the constant restructuring of wage laws would be cumbersome to the government and the employer, thus, the wage would not change as frequently as it ought to, which would result in some workers being overvalued or undervalued and firms suffering from labor surpluses or shortages (Gorostiaga & Rubio-Ramirez, 2007).
Regarding unemployment, studies have not indicated a positive relationship between minimum wage and employment (Clemens & Strain, 2017; Sturn, 2018; Kaufman, 2010; Neumark, Salas, & Wascher, 2014). In fact, any increase in the cost of labor results in the decrease in demand. Moreover, the studies have revealed that many firms, instead of firing workers, have simply reduced their work hours or increased the price of their goods or services, thereby, absorbing the increase in labor cost (Allegretto & Reich, 2018). These decisions affect the consumer, either by decreasing their discretionary funds, or by reducing their demand for goods and services. If consumption decreases, then the GDP will follow suit, assuming ceteris paribus.
Both the rights-based and results-based arguments neither represent classical economic theory nor support the free market system. Each advocates for significant government involvement through public policy that creates a price floor in the labor market. By creating a price floor, and encouraging its increase, advocates for increasing minimum wage prevent the free market from naturally reacting to economic disturbances. In so doing, the government creates a surplus of labor within the market, thereby, increasing the unemployment rate. The law of supply and demand cannot be controlled by external forces, such as minimum wage, without significant ramifications within the market. Economic theory and the historical record affirm the futility of trying to control the free market. Capitalism functions best when government interferes least (Friedman, 2002; Smith, 2003; Hayek, 2007).
Advocates for minimum wage increases are guilty of three vital errors. First, they assume that minimum wage is successful and helping the economy grow. The evidence suggests that, at best, the effects of increasing the minimum wage would be negligible, there would be no significant growth in wages, especially for the low-income worker, and there would be no improvement in the unemployment rate. In fact, the demand for labor will decrease as its cost increases (Allegretto & Reich, 2018). Second, proponents for minimum wage create a false dilemma, where the only possibilities for alleviating poverty and unemployment are to be found in either the government or the private sector. Historically, neither government aid nor private charities have made significant impacts on poverty levels.
Rather, capitalism itself has been the most effective tool in alleviating poverty long term. Unfortunately, minimum wage does not enable capitalism to function as it ought because it predetermines a minimum price that all must adhere to and obey (Richards, 2010). Associated with this, the third error is the misunderstanding of economics and, in particular, capitalism. Capitalism is an economic system based on rule of law and private property, in which people can freely exchange goods and services. Capitalism enhances individual freedom and counteracts any baser human instincts, like greed, by creating win-win scenarios within the marketplace. A free economy requires political freedom and free institutions of civil society to produce the greatest outcome. Consequently, public policy, like minimum wage, interferes with the very nature of capitalism making it less efficient. Capitalism does not guarantee all people will win in every competition, rather, it allows more win-win situations to occur than any alternative, such as socialism (Allard, 2016; Friedman, 2002; Hayek, 2007; Richards, 2010; Smith, 2003).
Evaluation of the available data and policy alternatives reveals the long-term inefficiency of minimum wage laws and the danger an increase in minimum wage poses to the economy. The costs associated with minimum wage, economically, politically, and socially, are too great and have proven to be ineffective at alleviating the problems of unemployment and poverty (Allegretto & Reich, 2018). Therefore, it is recommended that minimum wage laws be reformed.
One radical alternative suggested is the elimination of minimum wage altogether. Proponents of this policy claim that the absence of minimum wage laws will lead to greater economic growth because of the power of the free market; government interference would be limited and economic freedom would be maximized. Although this solution sounds ideal and, therefore, unrealistic, it is the nature of capitalism to guarantee livable wages and so, it would not be in the best interest of the firms to offer wages below the current, expected wage rate (Heise, 2018; Knabe & Schob, 2011; Schroeder, 1955). Another popular policy alternative to raising the minimum wage is to increase funding to the Earned Income Tax Credit (EITC) because of the unemployment effects caused by minimum wage legislation. The EITC functions as a subsidy, incentivizing firms to employ lo value labor. Thus, this policy would decrease the unemployment rate more effectively than an increase in minimum wage. Unfortunately, the primary problem with this policy is the added cost to the consumer via taxes (Neumark & Wascher, 2001; Neumark & Wascher, 2011; Sabia, 2014).
Supporters of increasing minimum wage argue that an increase in overall income and GDP, both real and per capita, will inevitably result in a decrease in inflation, unemployment, and poverty. However, critics of minimum wage laws argue the antithesis and caution against such an increase so as to avoid higher unemployment rates, outsourcing, and an increase in overall price levels. Instead they suggest either the complete elimination of minimum wage or a deregulation of minimum wage mandates, allowing more discretion within the private sector. The data supports the critics of minimum wage, but as such, it does not take into account other important factors of minimum wage, namely, human nature.
Herein lay another oft overlooked feature of capitalism. Capitalism encourages and seeks to maximize economic freedom. As such, it is characterized by competition, which is the primary feature responsible for counteracting vices, such as greed and exploitation. Capitalism’s reliance on individual freedom, voluntary trade, and competition produces a market in which it is possible for laborers to be compensated fairly and equitably, without the need for minimum wage laws. As a result, there is no need for any external influence to fix or control the market in order to achieve this benefit, the free market does it naturally. Understood properly, capitalism itself provides policy alternatives regarding minimum wage. Complete overhaul of the existing system is not practical, but policies that allow firms to determine the appropriate wage rate given their location, market, and culture are not only possible, but also more desirable and effective (Friedman, 2002; Mill, 2008; Richards, 2010; Smith, 2003).
A majority of society is unaware of economic interplay and the insufficiency of one factor, such as minimum wage, to effect significant change within the market. Thus, any government policy designed to address the issue of minimum wage must be more robust and comprehensive, focusing not only on the sub-factor of the price of labor but also on the greater concomitant policy issues integral to economic growth, such as tax policy, monetary policy, and regulatory policy. The solution to the problems of poverty, unemployment, et al. cannot be achieved by controlling the market with minimum wage laws because they are a short-term solution to an enduring problem. Capitalism, minimally regulated, has been proven to be the best long-term solution.

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