The official student newspaper of University of Wisconsin-Eau Claire since 1923.

The Spectator

The official student newspaper of University of Wisconsin-Eau Claire since 1923.

The Spectator

The official student newspaper of University of Wisconsin-Eau Claire since 1923.

The Spectator

Debunking minimum wage

There is a big debate in the policy-making world that surrounds the topic of minimum wages, which are meant to provide individuals with the means to live decently. Moreover, contrary to what the opponents argue, it supposedly does not increase unemployment, but actually decreases it to the overall benefit of society. Some Republicans, including President Bush, who traditionally opted for less market regulation, have also expressed their support for a minimum wage, although a more modest one. Evidence shows, however, that such measures aimed at protecting the poor are misguided and, in fact, do more harm than good.

According to economic theory, an increase in the price of a product will result in a decreased demand for it. That is the law of demand and it applies also to the labor market. If the government forces firms to pay more for the workforce they hire, employers will have three options.

The issues at stake here are real.

First, they could replace less productive workers with more productive ones and hence offset higher costs with greater output. In this scenario, the poor lose, because they tend to be less educated and are the first to be replaced. Moreover, employment does not increase, but rather stays constant at best.

Another option for the employer is to outsource. In today’s interconnected and globalized world this becomes easier to do and many firms choose that alternative. They avoid an expensive workforce in the domestic market and hire cheaper labor, which can be found in less developed countries. Instead of being helped by the minimum wage, people subject to it lose their jobs and have an even greater problem finding a new one.

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Finally, companies can choose to automate and hire more capital instead of labor. That way they avoid paying higher wages. This becomes a good option when wages rise to a point when capital-intensive production becomes worth considering. Again, the ones who were supposed to be protected are in fact those who pay the highest price. They lose their jobs and have an even greater problem finding a new one due to their low levels of training.

The idea that minimum wages do not decrease the amount of people employed has been popularized by several economists, most notably David Card of the University of California-Berkeley and Alan Krueger of Princeton University. However, other studies show that higher labor prices actually do have a negative impact on employment. A study by Donald Deere, Kevin M. Murphy and Finis Welch, which was published by the Cato Institute, shows that every time the minimum wage was raised, the market responded with a lesser demand for labor. Higher unemployment was the result in several states on which they focused. Youngest workers were the most obvious victims. They form a large portion of the low-income labor pool and their status is less ambiguous than that of other groups in society.

A survey published by the Journal of Economic Perspectives reports that nearly three-quarters of economists at America’s top universities agree that a minimum wage increases unemployment among the young and unskilled. About one-third of economists agree right away, and another third agree with some reservations.

America is a republic and perhaps a partial solution could be sought in this very structure of the state. Tim Kane, of the Heritage Foundation, proposes to give more freedom to individual states and let them decide whether a minimum wage policy is a good idea. The highly unionized New York City could establish a higher minimum pay an hour and when troubles come, the remaining 49 states would not suffer as much, but rather learn and avoid similar mistakes. However, if this policy proves to be successful, others could follow the proven example.

It is not true that an increase in the federal minimum wage will push up real wages. Average pay in the United States has been increasing in the past several years, even though the minimum pay remained unchanged during the same period of time. Real wages rise hand-in-hand with productivity. The latter is a result of better entrepreneurship – not policies set up in Congress.

Nevertheless, as I have mentioned before, both Democrats and Republicans are supporting the basic idea of a minimum wage as a way to “fix” the free-market forces, although to a different extent. Supporters of this legislation are right to point out the lack of consistency among opponents. That should not be the case, and misinformation is to be blamed.

The very idea of an imaginary safety line, which the minimum wage provides, is appealing to all policy-makers. They fight for votes and try to make society better off; at least that is the hope. However, the issues at stake here are real and any mistakes result in real struggles that people have to face later on. Instead of hobbling the U.S. economy and making finding a job harder, all politicians should face the facts presented by experts and stop defending the welfare status quo. Doing otherwise would only do more harm than good.

Wisniewski is a senior economics and Spanish major and a columnist for The Spectator.

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Debunking minimum wage