Attack on the unskilled

The minimum wage.

Having worked in the restaurant industry for a large portion of my working life I have heard first hand every argument in the book for the legitimacy of increases in the minimum wage. For the sake of this post we will ignore the obvious issues regarding the morality of the coercion (i.e. gun to the head) on small business owners.

There is always really only one major argument in the favor of a rise in the minimum wage: to protect the poor and unskilled. It is theorized that since poor people are currently making minimum wage, hence their being poor. Since these people are making minimum wage they must then be assumed to be unskilled. It is then theorized that if we allow the market to dictate wages these people will make ever less money, resulting in a larger pool of poor and unskilled workers. If one just took that and didn't look into the logic and reason of the theory, one might assume that to be true. In fact, that seems to be what most people are prone to do (especially our legislators, both on the left and on the right).

However, we must examine whether any of these assumptions are actually true. After all, the very coercion that we are using is based on the premise that it (the minimum wage) is good for the poor, and that to aid the poor and destitute truly is the goal of gov't (in the eyes of the liberal left). So I suggest we do as Ayn Rand so often suggested, "check the premise."

First off, are the majority of poor people making minimum wage? This is difficult to ascertain as the actual group of individuals both currently considered "poor" and those making minimum wage is an elastic number, that is, these numbers are constantly changing. However, we can approximate. According to this article, as of 2005, 8% of service workers (that is, primarily restaurant workers) were making minimum wage, compared with less than 1% of workers in other professions. I'm unsure as to what the aggregate percentage of total workers making minimum wage is, but just to be safe let's say it is 2%. Now, according to this article, the percentage of the U.S. population living in poverty is approximately 13%. Now, admittedly, a greater proportion of the poor are going to be making minimum wage than those who are not poor (I don't accept that the entire number of people making minimum wage fall into the category of poor because I know that I personally made minimum wage as a server for many years yet made a very decent living through my total compensation, i.e. tips). So just for kicks, let's assume that every person making minimum wage is poor and that every unemployed person is also considered poor (which is also untrue and at the time of these statistics the unemployment rate was roughly 6%). So accounting for both those assumptions the worst case scenario is that less than 1/3 of the working poor were making minimum wage. Undoubtedly many more of these made more than minimum wage after additional compensation as most of minimum wage jobs are service jobs. So it is safe to say that a very small proportion of poor people are making minimum wage at one particular time. So that premise is shot down.

Now the premise that those making minimum wage are unskilled. I cannot really argue this one. Relatively speaking, I would accept the idea that they are unskilled. But does raising the minimum wage help these people become more skilled? According to several studies by Hashimoto, Leighton and Mincer, and Ragan, minimum wage causes employers to cut back on training. This would seem to be counter-intuitive. If you were forced to pay unskilled labor a higher wage, why would you not train them so you can get greater production out that labor? The answer lies in a study by Robert Hall in 1982 in which he concludes that minimum wage causes increased turnover among those making minimum wage. So there is the answer, no one will pay the unskilled for additional training at higher wages because the very tactic that created the higher wages is directly causing turnover. Or more simply put, why train an unskilled worker at higher wages for another employers benefit?

So really the best reason for a rise in minimum wage is to increase the total wages of the working poor then. However, even that premise seems to be the opposite of reality when it comes to minimum wage and minimum wage hikes. I was personally able to find over 15 independent studies proving that minimum wage and minimum wage hikes cause total unemployment to rise and, even more distressing considering the goal of minimum wage, unemployment to rise among the unskilled, among teenagers and young adults, and among minorities. Now ask yourself, which demographics are most highly correlated with poverty in America? The answer is teenagers, young adults, and minorities. So here we have government interfering in the labor market in the name of altruism, in the name of the poor and helpless. The result, the very thing that is supposed to help the poor is making them worse off.

That's not even the end of it. According to a couple of studies, most notably by Adams in 1987, minimum wage and rises in minimum wage cause inflation (all other variables remaining constant). Now who is hurt most by inflation? Is it the the rich, who are able to absorb inflationary pressures, especially among core inflation, with their substantial discretionary income? Or is it the poor who spend a greater proportion of their income on core needs such as food, shelter, and transportation? For example, let's say person A is rich. Person A currently spends 50% of his income on basic needs, or "core" needs. Let's say this amounts to $100k/yr on core needs. So this person is taking home $200k/yr. Just for simplicities sake, let's say there is a 1% increase in inflation. That means person A's core expenditures are now $101k/yr. It is unlikely person A even notices. Next you have person B, who is poor. This person spends 100% of his income on "core" needs. He makes $15k/yr but he also spends $15k/yr. With a 1% increase in core inflation he now needs $15,150/yr. That person really felt it.

So minimum wage can truthfully be said to hurt the poor to a greater extent than it does the rich.

So with elections coming up this November, which of the options that you are considering would encourage a minimum wage hike?

Think about this, those of you considering either Tarryl Clark for Rep or Margaret Anderson-Kelliher for Governor.