Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

The Injustice of a Minimum Wage

Written by johnleemk on 12:23:27 am Dec 22, 2007.

Don't hire people. According to conventional economics, this is the ultimate message a minimum wage sends to employers, discouraging them from hiring. This hardly seems irrational — when we set a minimum price on something, people are less likely to buy whatever we are selling.

Yet in spite of this, there is a striking consensus amongst governments of the developed world (remarkable, considering that these are countries which can't agree about things like climate change or free trade): almost every developed country has a minimum wage.

Even more interesting is that economic studies have not been able to find the conclusive link between minimum wages and increased unemployment that economic theory tells us ought to exist. These findings would at first sight appear to support some sort of minimum wage.

But why do we want a minimum wage in the first place? The answer is simple: we think everyone who works deserves some minimum amount of compensation. Fair enough, isn't it?

But if this is what we want, it does not immediately follow that we should implement a minimum wage. After all, another way of achieving the same outcome is giving everyone who is paid below minimum wage a tax break proportional to the disparity between their actual income and the income we would like them to have.

There is no real difference, at least from the social justice point of view, between this tax credit proposal and the minimum wage policy. Or is there?

One thing which has always struck me (and a number of other critics of the minimum wage) is that the minimum wage is extremely unfair to employers, employees, and just about everyone else, for a number of reasons.

It is not immediately clear how it can be just to treat a multinational corporation and a neighbourhood grocery store exactly the same way. The minimum wage is effectively a tax on hiring, except that instead of paying it to the government, you pay it to your employees. And uniquely amongst taxes, the total amount you pay is dependent on how many people you employ — how much you consume. That makes it equivalent to an indirect tax, where the burden falls disproportionately on the little guy.

For the neighbourhood grocer, the minimum wage can very well be the difference between staying in and going out of business. For the multinational corporation, paying the minimum wage is probably chump change.

Meanwhile, there is a huge difference between a 16-year-old working part time, a 22-year-old university drop-out, a 35-year-old single mother, and a 45-year-old who just got laid off from his blue-collar job. Yet the minimum wage entitles them all to the same minimum amount of money, when they all have different needs. The government mandates that they all deserve to be paid the same minimum amount, but for some of them, a job is the difference between paying the bills and not having food to put on the table, while for others, a job is simply a way to pass the time when they're not getting drunk.

And this really brings us to the next issue: why on earth should I not be allowed to take a job if both me and my potential employer can agree on the wage? Would you rather I not work at all? What if I am that single mother who has two young children to feed, and what if my prospective boss is that grocer who can't afford to pay the minimum wage? Even if I am that 16-year-old student, and I am looking to flip burgers at McDonald's, why shouldn't I be allowed to work at a rate I choose? How is it good for society if we lose burger-flippers or grocers, and people go hungry, all for the sake of satisfying our guilty conscience about a "living wage"?

You can argue that the way the minimum wage works is egalitarian, but that would be rather hypocritical of you. The whole point of "social justice", of redistributive policies like the minimum wage, is to treat people differently because society hasn't been fair to them. By treating everyone the same, you are effectively saying you don't care about taking care of those differences society has created — that you don't want to give people opportunities they have been denied by society.

And that really is ultimately what the minimum wage does. It is a poorly-targeted policy, and one that does not do what it really sets out to do: give the disadvantaged a fairer shake as much as is possible. This alone is a reason to scrap the idea; the obvious inefficiencies it raises add further impetus.

We ought to note that the studies usually cited as showing no conclusive link between the minimum wage and unemployment were unable to tease out the effects of the minimum wage because of other developments in the economy. When you are comparing the effects of a minimum wage against a backdrop of billions of other changing variables, you would not be able to draw any strong conclusions about the minimum wage without some way of isolating its impact. Economists strongly suspect that these other changes in the economy drowned out any impact the minimum wage had; there certainly is no strong reason to believe that supply and demand for labour behave differently than they do for other things.

If we want to be truly fair and just, then here is what we really should do. We should give people a tax break inversely proportional to their income (that is to say, the more they earn, the smaller the credit they get). That's it. The secondary school student doesn't need the money, so he doesn't get it, but those who need their earnings supplemented will have the funds they need.

The money to support this generosity will come out of taxes levied on either the population, or the corporations. (Let's not delve into the subject of who should bear the greater tax burden — the consumers or the producers — since that would deserve a whole book.) The grocer who can barely break even won't have to worry about closing shop, while the multinational's CEO will have to pay for more than just the people his company "exploits".

Not only is this a fairer outcome, but it is more efficient as well, for reasons that should be obvious. Why haven't we done this? Probably because the minimum wage is more convenient. It's a simpleminded solution to a complicated problem, and it satisfies our moral conscience. It's just too bad that the road to hell is paved with good intentions.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

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