First things first, Reich’s goal in this video was to get people to support a raise in the minimum wage to $9/hr…yet, he argues that if the wage were to keep up with the inflation rate, it should be $10.56/hr. “It’s only fair”, he says. Fairness is half of his argument, but the minimum wage he proposes doesn’t even meet his own standard of fairness. Right off the bat I’m wondering if I can even take this former Secretary of Labor guy seriously?
Second, he says that raising the minimum wage would be “good for the economy”. I chuckled a little when he said this, because from all the research I’ve done, it seems the opposite is true. From my first economics class, to the current economics textbook I have for my intermediate microeconomics class, pretty much everything says that minimum wage would be bad for the economy, and there certainly isn’t any evidence that it would be good. Let’s dive into why I believe a minimum wage is bad for our country:
A worker is only worth what they can get someone to pay them. If you make 9$/hr, but think you deserve $13/hr, ask for a raise. If you don’t get one, find a new place to work that’ll pay you what you think your value is. If you can’t get paid $13/hr, then by definition, you are not worth $13/hr to employers. That’s not to say you couldn’t reach that value through new training, experience, etc. Ultimately, workers and employers reach an equilibrium through this process of getting paid. But anyways, let’s get to the point. Above, you see a graph for a market of workers. The y-axis is the price of the workers and the x-axis is the quantity demanded of workers. In other words, the y-axis is the wage and the x-axis is the number of employees in a market demanded to work for a specific wage (y-axis). Make sense? If yes, keep reading. If no, tell me where you’re confused. You should see a supply and demand curve. As supply increases, demand decreases. Simple economic logic. OK, now onto the good stuff. As you can see above, Pe and Qe are the market equilibrium points for a wage and quantity of workers demanded at that specific wage. If we think that the market equilibrium is “unfair”, the government could add a price floor (Pmin). Pmin is the minimum wage. The government is interfering with the market, and as you’re about to find out, it has some undesirable consequences. Take a look at Qd and Qs, those are our new quantity demanded and quantity supplied points now that there is a minimum wage. Those have moved from the original equilibrium that was Qe. Qd has decreased, while Qs has increased. After the price floor was implemented (minimum wage), the quantity of workers demanded fell, and the supply of workers increased. In less technical wording: It is less desirable for employers to hire more people and unemployment increases.
I hope that made a little bit of sense. The first time I learned this, I was a little confused. Just keep looking at the graph, think about it, and try to understand what the price floor is doing. For a better lesson on price floors, click here.
Anyways, my point is that due to minimum wage, we could see an increase in unemployment. More people without jobs…..that doesn’t seem very “good” to me. Sure, the more skilled workers who are worth the new value, might benefit. But anyone not worth the new wage to an employer is out of luck thanks to the price floor.
Story time: Joe and John are both competing for a position at Company X. Joe is more experienced than John. John really wants and needs the job so his plan is to undercut Joe. John says he’ll work for 20/hr, while Joe will only work for 25/hr. Before the company is able to make a decision, the government sees that John is asking for less pay than John, but for the same job. This is deemed unfair. The company must pay a minimum wage of 25/hr to anyone they hire. This is great news for the more skilled worker Joe, he automatically gets the job, no competition. This is bad news for John, he has no chance anymore, and will be stuck unemployed until he finds a way to make himself as valuable as the government demands he be. Imagine this on a larger scale that applies to companies with many workers. Imagine all of the low-skilled workers who could be out of work because of the government forced wage law. How is that fair?!
Now, let’s pretend real quick that a company has 10 employees and they need all 10 employees to survive as a business. All 10 employees get paid the current minimum wage, but the government decided to raise the minimum wage. The company has two ways it can react:
- Adapt. They could reduce the hours of employees to make up for the new cost of the wage increase, but that might not work because with less hours, service could suffer. The company could also decide to reduce fringe benefits to make up for the forced wage increase (that might explain why many low wage workers often have terrible private pension and health care coverage). Either way, we’re back to where we started. The “real” wage is the same.
- The new wage increase is unsustainable for the company, they lose profits, business doesn’t make sense anymore, they close. All 10 employees are now unemployed. OR, because of the forced wage increase, the company decreases employee hours, but service suffers the company eventually goes under. All are bad scenarios.
This minimum-wage increase idea that Robert Reich proposes as “good for the economy” isn’t looking so good anymore. Reich claims that minimum-wage opponents are worried that companies will outsource jobs or replace people with machines. He also claims that opponents think that minimum wage will benefit only teenagers. Clearly, the argument against minimum-wage is much more substantial than what he says.
- Only 2.9% of all American workers make minimum wage or less
- The majority of minimum wage workers are between the ages of 16 and 24
- The average family income of all minimum wage workers is $53,113
- 23% of minimum wage workers are at or below the poverty line.
- 65% of minimum wage workers are above 150% of the poverty line.
Good Videos on Minimum Wage:
- Caleb Bonham: http://www.youtube.com/watch?v=_lfqCR8DKas
- Learn Liberty: http://www.youtube.com/watch?v=Ct1Moeaa-W8
Good Reading on Minimum Wage:
- Econ 101 and the Minimum Wage by Russ Roberts
- The Negative Effects of Minimum Wage Laws by Mark Wilson
“Let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty.” – Barack Obama
If raising the minimum wage will raise our poor out of poverty, then shouldn’t raising the minimum wage be an effective way to increase the wealth of our lower class? I have a question for Mr. Reich and other minimum wage advocates: Why not just make the minimum wage $20/hr? Or $50/hr? That would help everyone out a lot more, right?
Oh and one more question: What gives you the right to tell someone what to do with their own money? People build companies from the ground up through blood and sweat. The money they earn is THEIR money. The business they run is THEIR business. Unless we want to give up the whole freedom thing here in America, I say we leave them alone to run THEIR companies the way they want to.
Rather than just a response to Reich’s video, I hope this post helped arm you with knowledge to defeat the common misconception that minimum wage is “good” for our economy. Minimum wage doesn’t make sense logically or economically. Sure, it might sound nice on paper to some folk, but the unintended consequences are easily exposed.
I hope twitter user @OthewhomaniT and Mr. Reich were able to read this response to Reich’s video. Pretend for a second that it’s possible you could be wrong. Take a day to think about it.
Have a great week. Stay safe if you’re getting lots of snow like me! God bless!