Defending the Minimum Wage

by Dual Income No Kids on February 27, 2010 · 8 comments


The idea of a minimum wage is a complicated topic, and I know many people who favor themselves as free-market advocates. That ideology is in direct contradiction to something like a minimum wage. If we live in a completely free market then the market itself will set an informal minimum wage, and thus legislation that forces an artificial minimum wage level would be rendered unnecessary. Also, opponents of a minimum wage suggest that it causes inflation, forces companies to look outside the country for workers and actually does nothing to raise the standard of living of the poor.

Despite what some may suggest, unbiased, quantitative research into the affect of a minimum wage is sparse. Studies are usually either too narrow in their focus, don’t cover a significant enough time frame to study or their results are too inconclusive. If anyone can point me to any research that doesn’t present those types of problems, please point it out to me; I’d be happy to take a look.

The argument that a minimum wage goes against free market principles is a silly one to me, because to the best of my knowledge there does not exist a modern economy based on a completely free market. Say what you will about the role the federal government plays in our economy, but to me it’s not constructive to argue free markets when there is virtually no traction when it comes to changing some of the fundamental principles of how our economy is managed.

Other arguments are more substantive, and should be paid attention to – especially if research proves that a minimum wage has no impact on the standard of living for the poor. But the best defense of a minimum wage that I’ve read was written by Robert Prasch in the Journal of Economic Issues. To quote Prasch’s conclusion:

Finally, an increase in the minimum wage might also work to undermine systemic economic power and thereby be responsible for a more just, or at least a reasonable, distribution of society’s annual income. One also suspects that to the extent that the United States is currently suffering from a “stagnationist” economic pattern, an increase the minimum wage may be a popular, timely, and successful economic policy” [Mazur 1995].

Keep in mind this was written in 1996 he writes about a “stagnationist” economic pattern. When he talks about a “just … distribution of society’s annual income”, he’s referencing a commonly held economic theory that states that societies experience more spending across the board when income is more evenly distributed (this will probably be judged as controversial; for more background information on this topic, look into Post-Keynesian views on income distribution).

Regardless of your previously-held opinion on this matter, it’s a very interesting article to read. Readers, what are your thoughts on the minimum wage?

– Michael

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{ 8 comments… read them below or add one }

1 Financial Samurai February 27, 2010 at 11:58 am

Hi Michael,

I am happy there is a minimum wage b/c it helps fight for those who can't fight for themselves.

A floor is fine…. a ceiling is not.

Best, Samurai

2 elliott February 27, 2010 at 1:19 pm

I had an idea yesterday while discussing the minimum wage with my wife. Let me know what you think:

Set the nominal minimum wage to a living wage, but make the actual minimum wage inversely proportional to the unemployment rate. Thus, as unemployment increases, the minimum wage (and the cost of unskilled labor) decreases. With more people out of work, business owners could more cheaply hire those out of work. As unemployment decreases, the cost of labor rises.

Obviously, there are potential pitfalls, such as political manipulation of the unemployment rate and determining a living wage. What do you think though?

3 Donnie February 27, 2010 at 1:37 pm

I would be fine with getting rid of the minimum wage, if we had a strong social safety net.

4 Anonymous February 27, 2010 at 2:24 pm

The minimum wage is a form of price controls and is therefore a socialistic idea.

5 David Carlson February 27, 2010 at 2:49 pm

The only thing the minimum wage does is destroy jobs! It's an absolutely horrible idea and should be abolished immediately. It actually encourages capital investment that destroys the low paying jobs the minimum wage tries to "protect"

Here's a youtube video of Peter Schiff explaining why the minimum wage is terrible.

And heres an article by Peter Schiff about the minimum wage.

Schiff is a candidate for Senator of Connecticut.

6 Edwin February 28, 2010 at 6:18 pm

I support a minimum wage because of standard of living issues. The minimum wage is already too low for anyone to live a regular life, abolishing it would just make an increasingly impoverished underclass.

As for free market arguments, those are just silly. Free market ideals are based on many assumptions which, while good for building models, are not an accurate representation of a real economy.

I haven't looked extremely in depth at academic studies of this subject though so maybe there's something very informative I have yet to discover.

7 David March 1, 2010 at 4:58 pm

@Edwin

"I support a minimum wage because of standard of living issues. The minimum wage is already too low for anyone to live a regular life, abolishing it would just make an increasingly impoverished underclass."

So eliminating those jobs by encouraging capital investment is preferable? 0 income > some income?

Hmmmmm…..

8 Edwin March 1, 2010 at 6:53 pm

@ David

Well first off the minimum wage does not increase unemployment when we aren't in a recession, the natural rate is still reached and we are at "full employment".

In that case I'm assuming you think a cutting of the minimum wage in a recession will allow companies to hire more as their costs have now decreased. Which is a good point.

If the wage is reduced (through cutting of minimum wage), this reduces the overall price level. This is because as wages decrease, other wages are also affected in the same way. This makes it so goods are cheaper to produce and thus to stay competitive, sell for less.

A decrease in the overall price level increases the money supply. More money means more liquidity which people will try to use. This in turn lowers interest rates as there is already an abundance of liquidity in the system. And in the end you have an increase in demand.

Given that the interest rates are already at 0 the end result would be an increase in liquidity but no actual increase in demand. So far cutting minimum wage is just a wash.

But now that the price level is lower, the value of debts stays the same meaning debtors owe more relative to what they owed in the past. Now that debt is a higher % of their wage, they are forced to cut spending in other areas which would just lead to a fall in aggregate demand.

So by cutting minimum wages, in the end all we would have is lower demand and an even worse situation.

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