Debunking Minimum Wage Myths

By economictruthsblog
July 10, 2017

In the United States, I have noticed increasing amounts of local municipalities instituting minimum wage laws. This is happening in many states across America, with many people supporting it in the hopes of bettering workers’ wages. Unfortunately, minimum wage is economically dysfunctional and unethical, yet so many people who lack economic or ethical knowledge are supporting it in droves. In a recent article by Cap Action War Room / ThinkProgress from Alternet, the author provided 10 reasons for increasing the minimum wage [1]. From my own research, many proponents echo arguments reflected in this article. I will refute each of these arguments in addition to other common arguments for minimum wage.

Argument #1: “It Will Put Money Into The Pockets Of Hard-Working Americans. Raising the minimum wage to $10.10 will raise wages for 28 million workers by $35 billion in total. Since many of those workers will turn around and spend that money, that is a huge boost for the economy.”

Response: The study cited here kept everything constant except for wages when increased. They rely on multiplier effects of financial stimulus and only looked at the demand side of goods/services and labor markets. The problem with that is you only see the immediate effects without accounting for changes in the labor market. Even in the study, it makes claims that it will reduce corporate profits and will transfer income to minimum wage workers, not thinking of how businesses of all sizes will adjust to the higher labor cost. Profit margins are slim to some, and that can actually cause people to either fire their least efficient worker or cut costs elsewhere within the business. The claim that minimum wage will help workers and boost the economy is also fallacious since the economy doesn’t grow on consumption, but it grows on production. In other words, goods and services do not appear immediately because people want to spend their money right now, rather, they come from savings and investing in capital goods that make workers more productive which yields more wealth in the economy. The multiplier effect doesn’t exist just because people decided to pay immediately for consumption goods. In addition, the lost of marginal producers and the difficulty of young workers finding jobs would offset any gains from the minimum wage.

Argument #2: “It Will Reduce Income Inequality. The average CEO shouldn’t make 933 times more than a full-time minimum wage worker.”

Response: First, reducing income inequality by taking wealth from one person and giving it to another doesn’t do anything besides rob them. It does not produce positive effects that will make society any better. Saying that CEOs shouldn’t make x amount compared to a minimum wage worker has no basis when they perform different functions for their companies. CEO payment is decided through supply and demand, and what they negotiate when being hired for the position. If the company believes that the CEO would provide more value than the cost of hiring that person (likewise for the potential CEO in choosing the best options), then they will pay that high salary. According to We Are Capitalists, if you eliminate all CEO pay and distribute it back to minimum wage workers, it would not even increase their wages to reach 50 cents [2].

Argument #3: “It Won’t Hurt Job Creation. States have raised the minimum wage 91 times since 1987 during periods of high unemployment, and in more than half of those instances the unemployment rate actually fell. Over 600 economists signed a letter agreeing that a minimum wage increase doesn’t hurt job creation.”

Response: That is another misleading claim. If it does not hurt job creation, that’s not an argument for minimum wage. Unemployment is counted towards those who are looking for work and is available to work, not those who abandoned their job search [3]. If they abandon their search, then they are not part of the unemployment numbers. That could very well mean that those who couldn’t get a job may not be counted in the data collection when higher minimum wage has made it more difficult for those competing for that type of work, which can lower the labor participation rate [4].
The point about 600 economists agreeing on minimum wage not hurting job creation is not a strong case at all. There are approximately 19,090 economists in the United States as of May 2015, and out of 600, that’s only 3% of the economists in the United States who agree with that statement [5]. In recent research, over 500 economists oppose the minimum wage [6], and a survey conducted by the University of New Hampshire Survey Center found that a majority of American economists oppose the minimum wage [7].

Argument #4: “It Is Unlikely To Significantly Impact Prices. A higher minimum wage would mean a DVD at Walmart will cost just one cent more.”

Response: There was no explanation of this. There isn’t any specific price increase, but prices do increase when businesses supplying a certain good or service goes out of business due to higher labor costs that minimum wage caused. Some businesses who are not price takers will raise prices to stay in business [8].

Argument #5:” It Would Help People Get Off Of Food Stamps. A study by the Center for American Progress found that raising the minimum wage to $10.10 would help 3.5 million Americansget off food stamps.”

Response: The study doesn’t take into the account of the tradeoffs of work and welfare. The problem is, the effects of it reducing people on food stamp is small since all it does is get some off of the eligibility list while the rest who can’t find jobs due to minimum wage will actually start signing up more for it. It will actually increase government spending on the welfare state [9].

Argument #6: “It Will Save The Government Money. The same CAP study found that, in conjunction with helping people get off of food stamps, raising the minimum wage would save the government $46 billion over 10 years in spending on the Supplemental Nutrition Assistance Program (SNAP) as people earn enough on their own to no longer qualify.”

Response: Same argument as #5.

Argument #7: “It Will Improve People’s Economic Security. It is no longer the case that the people making the minimum wage are largely teenagers. In fact, now more than half of workers earning under $10.10 an hour are forced to support themselves on that as their primary income.”

Response: In 2013, 50.4% of minimum wage workers were teenagers and young adults at the age of 16-24 [10]. If you raise the wages of these workers, again, there are unforeseen consequences where marginal workers and/or marginal producers go out of business, reduction in hours required, reduction in benefits (Ex: healthcare packages), etc [11]. They will cut corners in their business operations to stay in business, especially when competitors are competing to enlarge their profit margins. Workers will eventually gain experience and move onto other jobs or get promoted. A minimum wage will increase the wages of those who are currently working, and the turnover rate will reduce to keep the experienced workers but they will hire fewer newcomers [12].

Argument #8: “It Will Lift People Out Of Poverty. The non-partisan Congressional Budget Office states that raising the minimum wage to $10.10 would lift 900,000 people out of poverty. For full time workers earning the federal minimum wage, this bump would give them a raise of over $4,000 dollars — enough to take a family of three out of poverty.”

Response: As stated before, people earn higher wages as they gain experience. The more efficient and productive they are, the higher the wages they will earn. If we could solve poverty by forcing businesses to pay higher wages, then we would see third world countries increase their minimum wage on a national scale. In recent studies, minimum wage shows no effects of actually pulling people out of poverty [13].

Argument #9: “Businesses Recognize That They Will Also Benefit. Many successful businesses, such as Gap and Costco, already pay their employees wages above $10.10 so they can “attract and retain great talent“. And 60% of small business owners recognize that their businesses would benefit if we raise the wage.”

Response: The problem with this is that these businesses have done it voluntarily through competing for better workers. They attract workers by offering better working conditions, higher wages, benefits, and other attractive perks for working for their company. They do so organically and they can spare the cost to do so as they are investing in retaining and attracting the best laborers. In other words, these producers would have raised wages organically to outcompete other competitors while benefiting consumers and their laborers. If it were that great of an idea to raise wages from a business standpoint, then these businesses would have done so [14]. But the minimum wage is a shoe-fits-all type of law. It does not matter if it’s attractive for the clothing industry in a particular section of a city to raise wages, nor does it care if a compressed industry have razor-sharp profit margins where any higher input costs will run them out in the long-run.

Argument #10: “Millions Of Children Will Be More Secure. If we raise the minimum wage to $10.10,21 million children will have at least one parent whose pay will go up.”

Response: You may raise the wages of the parents, but their children will have a lower chance of obtaining a job when they do grow up should the minimum wage law stick around. That does nothing much for blocking their entry when they’re trying to gain experience [15].

Sources:

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Debunking Minimum Wage Myths

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