Minimum Wage

President Obama’s 2013 State of the Union speech included an interesting idea to raise the federal minimum wage to $9.00 and indexed to cost of living and inflation. Although he stated that this was an idea he shared with presidential candidate Mitt Romney in the 2012 election cycle, the Republicans frowned upon the overly progressive indexed minimum wage suggestion. In cinematic fashion, the Wall Street Journal video I watched focused on Paul Ryan, Ayn Rand (Objectivism ideology) admirer and Mitt Romney’s vice presidential candidate. Ryan reflected the view of his party with a stern face. The Republican party remained seated.

I can understand why the more conservative party would perceive a minimum wage raise as overreach in regulation and a “slippery slope” to a nanny state where government crowds out efficient free market forces. However, a developed society does not endorse slave labor, indentured servitude, nor outrageously low wages where its citizens cannot afford the most basic of essential needs. Much as water is a basic global human right, health care in some societies, and high speed internet according to some, the ability to pursue happiness is an innate American constitutional right – income is needed.

I propose another perspective on mandatory minimum wage increases as an efficient, regulation and government minimizing policy. Why do I think this? Increasing the minimum wage to cost of living sustainable levels would reduce government welfare obligations because it ensures that those who show personal responsibility (a cornerstone of conservative ideology) won’t need government assistance. If you reduce the total number of people who qualify for welfare, that naturally leads to a smaller and hopefully more efficient government. Although we will have less people who will need assistance, they will need much more per person because higher minimum wages will lead to market inefficiencies, such that there will be less jobs available at a higher price point (at least in the short run).

Usually, larger organizations find many economies of scale, but at some point, bureaucratic systems take hold, which perpetuates further bureaucracy. A leaner system that isn’t inundated with millions of people on the edge of poverty who need a special customized cocktail of welfare benefits may reduce redundancies and reduce the size of government.

It is argued by many economists that a higher price point for wages (a price floor) creates dead weight loss and thus higher unemployment because employers cannot raise prices fast enough or cut costs to offset these price changes. In the long run, as the economy structurally adjusts to this new setup, we may find that prices rise to cover the increased labor costs, so we’re back to square one, however purchasing power will have shifted. Even if prices increase, they will not increase proportionally to negate wages because more efficient industries will drive prices lower, relative to the overall increase in prices (inflation adjusted). At the end of the day, purchasing power will keep up with reasonable living standards to avoid welfare while those who are unemployed will get targeted assistance because unemployment works better as a signal than a poverty line.

Obviously, there are flaws and loopholes in this approach. Everyone could claim to be unemployed and some people may be completely neglected, but no system is perfect. What matters is that we consider and discuss idea and try our best to improve our world.

-fp

 

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~ by fp on February 14, 2013.

One Response to “Minimum Wage”

  1. NIce post. I think we suffer from a bit of myopia when looking at issues such as the minimum wage. There are many American companies with global competitors who will be at a greater disadvantage should the minimum wage go up. We tend to use that as part of the argument against hiking the min wage. However, the case can be made that the US & other advanced nations should leverage their collective influence to create a set of universal corporate standards. These can attempt to prevent employers who do not pay a living wage, who violate workers’ rights, & who pollute the environment from gaining a competitive advantage in their markets. If we can do something as absurd as set rules for warfare, I do not see why we cannot set universal employment standards & alleviate to some degree the pressure to keep our minimum wage at a low level.

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