For Gold, Peace, and Freedom


Minimum Wage Essay

October 7th, 2007

Notification of update 10/07/07: Although this minimum wage essay was originally published several months ago back in March, I have added some additional content to it in order to reflect the recent changes in the federal laws. At the end of the document, I have also provided explanations and resources regarding the minimum wage rates for each state and the curious exception for the territory of American Samoa.

Approximately two weeks ago, my brother needed a minimum wage essay for an online college course that he is taking this semester. Since political issue topics are not exactly his cup of tea, I decided to put my brain to work and create a minimum wage essay that would be suitable for submission and fulfill the requirements of the course. As blog posts go, it’s a little long (about 1800 words), but since I spent the better part of a day writing this thing, I might as well publish it here instead of letting it collect virtual dust on my hard drive. Hopefully some of you will find it informative and/or enlightening.

Minimum wage laws are generally not a good idea. Increasing the current minimum wage is likely to do more harm than good for businesses, employees, and even consumers. To illustrate the reasons why this is true, let us suppose that the minimum wage is raised by $2.10 (from $5.15 to $7.25) as in the proposed bill and then consider the possible alternatives for business owners, who must find a way to cope with the increased labor costs. After mulling over this particular issue for several days, I have discovered four possible paths that a business can take after a minimum wage law is passed. There may be other possibilities, but everything that I have been able to think of so far generally falls into one of these four categories. If anyone knows of any other distinct possibilities that I have not listed here, you can explain it in your responses and I will add it to the list later, along with my commentary and analysis.

1) Faced with the prospect of increased expenses and needing to maintain its current profit margins in order to remain competitive, the business “downsizes” and terminates part of its workforce, which creates unemployment. Additionally, the business is more reluctant to hire new entry-level employees in the future because it cannot afford to keep as many permanent staff on hand as it could before. Moreover, because it is being forced to pay artificially higher wages anyway, the company will often demand more experience, skills, etc. from any new worker that is hired. This effectively cuts off the bottom rung of the economic ladder by making it very difficult for people who have no prior job experience (but may still have a reasonable amount of formal education) to obtain their first job, gain the necessary experience, and advance in their careers.

Such a situation tends to hurt younger people and minorities even more than the general population. Ironically, these are usually the same kinds of people that the rhetoric of minimum wage law proponents claims to help. Milton Friedman, along with his wife Rose, echoed this sentiment in their book Free to Choose on page 238: “The high rate of unemployment among teenagers, and especially black teenagers, is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum wage laws. We regard the minimum wage rate as one of the most, if not the most, antiblack laws on the statute books.”

2) The business, perhaps out of sympathy for its employees, does not want to create layoffs or fire anyone, and may have already managed to weed out the most incompetent portions of its workforce. The business owner(s) realize that even after the law is passed, there will be a period of several months before the actual increases in the minimum wage become mandatory. So instead of letting anyone go immediately, they decide to offset the increased costs by reducing their staff slowly through attrition. Over time, a few people retire or quit voluntarily, but the company does not replace these people with new workers.

Meanwhile, the remaining workers feel better initially due to the increase in their wages, but then they begin to notice that they do not have as much energy left at the end of the day as they did before. As the employees eventually figure out (well, at least the ones who have some knowledge of basic math skills), this occurs because their work load is being gradually increased due to the fact that there are fewer workers trying to do the same amount of work. Not only that, but often the most capable, talented, and/or hard-working employees wind up being punished even more than the mediocre ones as they are asked to perform the duties of two or more people, sometimes including tasks that are not even part of those workers’ job responsibilities. The company becomes chronically understaffed, workers are stressed to their limits, morale gradually decreases, and the overall work environment actually becomes less favorable than before even though wages have slightly increased.

I actually experienced a situation similar to this several years ago when I worked at a minimum wage job as a dishwasher at a Chinese restaurant, and believe me, it is NOT pleasant! Fortunately, I learned from this experience, figured out that working for other people basically sucks (especially for someone that values personal and economic freedom as much as I do), and eventually got out of the “rat race” altogether by becoming a self-employed Internet marketer, but that is a whole other story.

3) The business cannot afford to condense its workforce because it has already “downsized” and is running relatively efficiently. The number of permanent staff cannot be feasibly reduced because each employee is already performing a critical function within the company. Also, the company may be planning to expand, which of course will require the hiring of more employees, and many of them will need to be paid at a higher rate than was initially expected. Therefore, the company simply passes on the increased labor costs to consumers in the form of higher prices for its products and services.

In this case, the increase in prices might make the business temporarily less competitive, but in the long run, this is usually offset because most other businesses will be forced to raise their prices also. The workers think that they are getting a good deal at first, but later they discover that things like food, clothes, housing, etc. are becoming more expensive as the wage and price increases have an inflationary ripple effect throughout the economy. The people who were living near the poverty line wind up right back where they started in terms of their actual purchasing power and economic potential.

Following the usual pattern, after a few years, the politicians who claim to represent these poor, disadvantaged folks will begin lobbying for another increase in the minimum wage because (surprise!) the first minimum wage increase did not bring them out of poverty as the politicians had originally promised. Eventually, after a few more years of political wrangling, another minimum wage increase is enacted, the cost of living increases even more, and the whole vicious cycle starts all over again. Albert Einstein once said that the definition of insanity is doing the same thing over and over again and expecting different results. The politicians in Congress keep raising the minimum wage over and over again and expecting different results by promising that THIS time, they will be able to eradicate poverty. Hmmm…

Meanwhile, those of us who are trying to save money in our bank accounts, investment accounts, etc. in order to increase our cash flow and provide for retirement are seeing the value of our savings eroded each year because the pitifully low interest rates that we earn on our savings simply cannot keep up with the overall inflation in terms of “real” dollars. The low savings potential coupled with higher living expenses and the seemingly never-ending demand by most Americans for more “stuff” may also tempt less fiscally responsible people into high levels of consumer debt. This saps even more of the people’s economic power through relatively high rates of interest on credit cards, loan financing, and other methods of spending money that they do not even have in the first place.

4) The business is a small “mom and pop” operation, and thus cannot afford to lose the few employees that it maintains. These employees may also have familial ties with the owners and are integral to the day-to-day operation of the company. This type of business cannot really afford to raise prices much either, because it is trying to compete with much larger businesses that can afford to offer lower prices due their ability to purchase materials in bulk, get volume discounts on wholesale purchases, enjoy reduced operating costs because of economies of scale, etc. If a smaller business like this tries to expand in order to compete, it will be very difficult because the new employees that will need to be hired will have to be paid at higher minimum wage rates, while “big box” companies such as Wal-Mart can outsource much of their labor to countries like China or Mexico where wages are much lower.

Because the minimum wage laws make it more difficult for smaller businesses to compete, the Wal-Marts of the world are able to drive out the small businesses in many areas and attain near-monopoly status in certain niches, allowing them to get away with relatively poor treatment of workers and other questionable practices that would be much more easily held in check by a more competitive marketplace. Unfortunately, faced with such an unfavorable business and regulatory climate, many small businesses are forced out of operation altogether, which results in reduced consumer choices, dislocation of the affected businesses and their employees, and a greater loss of economic freedom overall due to the introduction of even more government regulations, ostensibly enacted to combat the excesses of the larger businesses.

As we can see from the above scenarios, the effects of raising the minimum wage are almost always unfavorable; in a few instances, there may be temporary benefits, but these are offset by greater costs over time, making the net effect virtually nil. A better alternative to raising the minimum wage would be to repeal minimum wage laws but allow workers access to their full range of rights and freedoms so that they are better able to obtain a fair price for their labor in a fully open and competitive marketplace. At the same time, we should reduce excessive and unnecessary government spending, which will eventually allow taxes to be reduced, thus benefiting economically challenged individuals by letting them keep more of their own money. Reducing oppressive taxes and regulations should also make it easier for people to start and maintain their own businesses if they so choose, leading to greater economic freedom for individuals and more choices for consumers.

We should also strive to uphold important rights such as free speech, freedom of association, and freedom of assembly. This will allow people to protest against companies that pay unfairly low wages, discriminate against women and/or minorities, cause environmental pollution, or engage in other questionable practices that are sometimes undertaken by overzealous capitalists who do not seem to understand the importance of maintaining a high morale workforce or the benefits of cultivating good relations with their local communities. Americans should learn (or re-learn) the fine art of dissent, and should not hesitate to vote with their feet and wallets (or more specifically their cash, credit/debit cards, etc.) as necessary to encourage responsible business practices and discourage corruption in both the public and private sectors. For particularly egregious cases of unfairness in the marketplace, civil disobedience tactics such as boycotts, picketing, labor strikes, awareness campaigns, and other forms of creative nonviolence may be employed in order to ensure fair compensation and treatment of workers and also act as an important check against corporate excesses.

I hope that you have enjoyed reading this minimum wage essay. Here are some additional informational resources regarding other issues related to the minimum wage:

Current Federal Minimum Wage: The current national minimum wage for all employees that are covered under the Fair Labor Standards Act (FLSA) is $5.85 per hour, increased from $5.15 per hour effective July 24, 2007. This rate will increase again to $6.55 per hour on July 24, 2008, and yet again to $7.25 per hour on July 24, 2009.

Minimum Wage By State: Many states have minimum wage laws that mandate higher minimum wages than the currently prevailing federal rates. Some states do not mandate any specific rates, and a few states even have lower rates than the federal standard. In all cases, however, when there is a difference between federal and state minimum wage rates, employees must be paid the higher of the two rates. In order to see the exact minimum wage rates for each state, you can go to http://www.dol.gov/esa/minwage/america.htm. This will bring up a clickable map where you can click on a specific state and see all of the applicable laws and rates that pertain to each state.

American Samoa Minimum Wage: The territory of American Samoa represents a special exception to the normal federal minimum wage rules. In this particular jurisdiction, the federal rate of $5.85 per hour does not apply; instead, minimum wages are set according to the industry category of the employee. You can view the most recent figures for minimum wages in American Samoa here. Overall, the rates are somewhat lower than in the continental United States. They range from $2.57 to $4.09 per hour depending on the exact industry classification.

Post Your Comments, Opinions, or Suggestions Here:


Email (optional)

Website (optional)