Minimum wage

2014-02-22 minimum wage

I don’t think there is much that has not yet been said about the minimum wage. All I will try to do here is a summary of the points illustrated with my very personal experiences.

Just about any economist would agree (or would hate to admit but must) that minimum wage laws do not make any economic sense. It creates unemployment, especially among the young, inexperienced and disadvantaged. Price controls are never good for the economy, price controls are always tools of politics and until politics dies, price controls will be with us. We could speculate about the reasons behind their popularity, but for now, I will just do another run around the reasons showing why it is a bad idea.

My personal stories with the minimum wage

I have worked for minimum wage in Canada on a few occasions. I arrived here with twenty dollars in my pocket in 1980. My first job was under the table, helping a contractor with painting houses in Westmount. He paid me somewhat above the minimum wage. He paid me what the job was worth.

My first real, well, official, job in Canada was for minimum wage. Finding a job as an immigrant was not easy. Everybody was asking for “Canadian experience,” which is an issue for most immigrants. How can you get some experience if nobody is willing to give you a chance to gain it? Eventually, I was hired as a dishwasher in a fancy Italian restaurant. The minimum wage at the time was $4.60 in Quebec. I did the job for two weeks before I got promoted to be a cook for $8.- They did not actually need a dishwasher, they needed a cook because they had some problems with one of their existing ones and wanted to replace him. Hiring me for the minimum wage job gave them a chance to check me out. I believe the strategy was perfectly legitimate, but if the minimum wage was higher, they may not have given me a chance.

Later, but still as a relatively new immigrant, I did some part time pizza delivery. Anybody who ever worked in a job with tips knows that the pay is just an afterthought.

I had another three job experiences that taught me about the minimum wage.
In a desperate attempt to supplement my meager income driving a delivery truck I allowed myself to be suckered in into a multi level marketing scheme selling kitchenware. The product was excellent but grossly overpriced. I was harassing just about anybody I knew to give me a chance to do a ‘home presentation’. I gave up after about a month, after I made a single sale for a paycheque of $70. Translated into an hourly wage, that was less than a dollar per hour for my effort.

Shortly after that failed attempt, I started working for Swiss Chalet delivering their stuff. They did not pay salary; they paid commission, 20% of the price on each delivery. The main income here again was the tip, but the business model completely went around any minimum wage law. There was lots of hanging around involved and it happened a few times that my commission would not have amounted to what the minimum wage was supposed to be at the time. The main benefit of this work for me was the flexibility. Since they did not pay me by the clock, I had a somewhat flexible work schedule. What made the biggest difference in my income was the dispatcher, the person deciding what to give me for delivery. Distance, neighbourhood, kind of orders.

When the Canadian dollar was low compared to the American, Microsoft opened a product support centre in Mississauga using a third party for staffing it. It was above the minimum wage, but more than 50% below my previous salary. High pressure work conditions, low pay, no benefits. It was a tough job, yet to this date I consider it one of the best deals I ever had. In the year and a half I worked there I learned more than in the previous ten. About 20% of our time was spent in training.

My first job gave me an opportunity; the food delivery business gave me flexibility; working for Microsoft gave me the most amazing learning experience.  The point of these stories is that each offered me some sort of special benefit. None was forced on me. There are jobs in this world today that I would still do for room and board. Just so that I can be there.
Nobody is forced to work in our world for any amount and as long as people get into an agreement with free will, nobody should stop them. The only force, the only threat of violence the only coercion in this issue is coming from the state and the advocates of laws interfering with mutually beneficial, voluntary contracts. Those who advocate for whatever level of minimum wage claim to do it with the best intentions, with the most earnest desire to help the victims of exploitative, laissez-faire capitalism.
The problem is that there is no problem to solve while the minimum wage law creates problems and the uninterested altruism of its proponents is a highly dubious claim.

The minimum wage is not a problem

  • For a large portion of minimum wage workers, the wage is the pocket change; the real income is the gratuities. A good waiter or bartender can easily make 2-300 dollars a night.
  • The vast majority of minimum wage workers live in affluent households.
    This Study from the Fraser Institute points out that:

81.5 per cent of minimum wage workers in Ontario do not belong to a poor household (here poor is defined in a relative sense). In addition, the majority of minimum wage earners (56.3 per cent) are dependents living at home with their parents while a considerable proportion has a working spouse (17.4 per cent).

  • A significant proportion of minimum wage workers are working part time where the job is not their primary source of income, where they are not dependent on it for their livelihood.
  • The minimum wage is very seldom a permanent state; it is just a phase in most people’s life.
    My personal phase lasted two weeks.
  • There has never been a ‘race to the bottom.’ Quite the contrary. Average wage for low skill work rises without any coercion. Minimum wage laws just stop the natural rise until conditions catch up with it. Check this article for details.
    The argument of the left that “without minimum wage there would be a race to the bottom” is begging for the question:  why isn’t everybody working for minimum wage today? If the assertion was true, we would all be working for minimum wage.

The minimum wage has negative consequences

  • The minimum wage creates unemployment
    According to this study, 10 percent increase in the minimum wage lowers low-skill employment by 2 to 4 percent and total restaurant employment by 1 to 3 percent.
  • Minimum wage laws are racist (Walter Williams and another Walter Williams video with excellent historical references,  Thomas Sowell, Guy Bentley and we could go on)
  • The minimum wage increase will make it much more difficult for first timers on the market to find jobs.
  • The minimum wage hurts the most vulnerable workers while not doing much for those who are already productive enough to deserve more. See the LearnLiberty.org video that makes the point.
  • The minimum wage hurts temporary and part time workers the most.
  • The minimum wage will increase prices mostly on products and services that are used by, and needed mostly by the poor.
  • The minimum wage makes life less pleasant.
    If Walmart cannot afford to hire greeters for minimum wage, then it won’t. You may have to wait a little longer for your dinner in the restaurant as you will be dealing with a slightly more overworked waiter.
  • The minimum wage devalues the effort of those who proved themselves to deserve more.
    Picture yourself working for minimum wage and trying to prove yourself to get more. Shortly after you get your raise for a job well done, an increase in the rate will force your employer to pay the same rate to all you worked hard to rise above, making your extra effort devalued. Your boss will be penalized by the extra cost of labour; he will not be able to adjust every employee’s wage to re-establish relative merit. The message of the minimum wage is that effort and hard work does not matter as much as political power.
  • Minimum wage will put pressure on workers to be more productive or lose their job.
    Minimum wage creates unemployment which means a larger pool of potential candidates competing for minimum wage jobs. Employers will try to recoup the extra expense by demanding more from each employee who in turn will know that they can be easily replaced.
  • The value of the minimum wage increase can be very quickly offset by the inflation it will inevitably create.
    The minimum wage puts an upward pressure on wages, raises the cost of goods – the two most important components of upward pressure on inflation.
  • The minimum wage laws would make it more difficult to gain skills and experience.
    If the minimum wage was higher at the time, I may not have gotten my chance.
  • Minimum wage spurns automation
    Do you remember elevator operators, gas station attendants and telephone switchboard operators? In a few years you may start reminiscing about cashiers, and waiters taking orders from you. Automation tends to target low skill work, the domain of the minimum wage jobs.
    The food service industry is already on the verge of large scale automation. Minimum wage increases will push the whole industry to move faster in that direction.
  • Minimum wage laws encourage employers to find other ways to save on labour such as more commission and piece work that will leave workers far more vulnerable. It can also produce a sharp increase in unpaid ‘internships’ as it did in Australia.
  • The minimum wage is just another price control distorting the market.

The benefits of the minimum wage are political, not economical.

  • The biggest beneficiaries of the minimum wage laws are racists and labour unions.
    Listen to this discussion between Walter Williams and Thomas Sowell that makes the point.
  • The minimum wage benefits its proponents, not the people who are working for minimum wage today.  It is not an accident that labour unions are such heavy promoters of minimum wage increases. Many unions have their wages indexed to the minimum wage.
  • The supposed benefits of the minimum wage increase could be easily achieved by simply raising the base amounts of non-refundable tax credits.
    In a way, the minimum wage is just another government tax-grab by pushing more people into the taxable income bracket. A minimum wage earner at a $10,-/hour rates makes about $20,000.- per year and pays about $2000.- in taxes. Getting the tax back would achieve the same effect in his income as the increase in the rate.
  • The minimum wage promotes and perpetuates a Marxist world view creating an antagonistic employer/employee relationship. What was a consensual relationship before becomes a coerced one creating the very problem it was set out to remedy.
  • The minimum wage increases are creating receptive clients for the socialist message. By increasing poverty and unemployment the socialists can offer their ‘helping hand’ to the very people they pushed into poverty and unemployment by depriving them of the opportunity to work.

Did I leave anything out? Let me know, I will be happy to add it to the list.

As I mentioned at the start, it is difficult to say something on the subject that was not said before. All I tried to do is collecting the arguments that may have been much better presented in some original sources:

This short video from LearnLiberty.org makes the problem very easy to understand.
Naturally, Henry Hazlitt has a chapter on it in Economics in one lesson.
This Wikipedia article is an excellent source of references on the subject.
A study from the Fraser Institute.
A Cato Institute Policy Analysis.

An excellent debate with Thomas Sowell hosted by William F. Buckley Jr.
….and if you can take it, listen to this interview, Peter Schiff talking to a PhD student of economics.

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