The Minimum Wage in One Paragraph

There are very good theoretical arguments against the minimum wage. Here’s an argument based on the reality of the U.S. job market:

Almost all full-time workers (99.4%) are earning more than the minimum wage, and almost all full-time hourly workers (98.3%) are earning more than the minimum wage. Most importantly, the fact that more than three out of four teenagers (77.2%), who are the least skilled and least educated group of workers, earned more than the minimum wage in 2011 would suggest the minimum wage is mostly an entry-level wage for beginning workers with no skills. The reality of the labor market is that even a large majority of previously unskilled teenage workers are earning more than the minimum wage as soon as they acquire minimal jobs skills and work habits, and can demonstrate their value to employers.

(Thanks to Kevin Gutzman.)

Daniel

I do not feel that this is a strong argument one way or another regarding the minimum wage. If so many people are earning above the minimum wage then that would suggest little harm in an increase. Also, simply because unskilled teens earn more than the minimum wage doesn’t mean that there isn’t economic capacity of business to increase their wage even more. For those same teens, the 22.8% who earn the minimum wage would benefit from an increase.

I feel that the best way to discuss the minimum wage remains with a deadweight loss approach. By framing the policy in terms of a loss, that unemployment will increase among young minorities, people will be in a defensive mindset to not change the minimum wage.
http://www.TomWoods.com Tom Woods

I interpret the data this way: the minimum wage is irrelevant to almost everyone, so increasing it isn’t a serious answer to people with low incomes. But it is harmful to people trying to break into the job market in the first place.
Franklin

“…the best way to discuss the minimum wage remains with a deadweight loss approach.”

Not necessarily disagreeing but simply emphasizing that this, and many other predictive calculations are utilitarian arguments. We’ve thrown in the towel on the moral basis; i.e., nobody and no body have the right to uninvitingly intrude on a peaceful transaction between/among individuals.
Since that argument is virtually fruitless in today’s political climate, I appreciate why it’s typically ignored. But I think it ought not be.
Bob Dog

I have another take on it. I suspect that a huge number of these 99% of jobs are paying a very small amount more than minimum wage, like 25 cents, certainly less than a dollar. And that’s because the employers don’t want to be perceived as paying “only minimum wage”. Sort of a shame factor. I’m not a proponent of the minimum wage by any means, but I suspect that it’s doing what it was designed to do in the sense that it’s keeping wages higher than they would otherwise be.
Anonymous

A slightly different take… in 1970 minimum wage was 1.60… 1 hour at that wage would get you 1.4 grams of gold. Today, to get 1.4 grams of gold in 1 hour of work would require minimum wage to be around 72 dollars an hour.

The problem has never been the minimum wage (which shouldn’t even exist), it’s with inflation destroying purchasing power. Wages haven’t kept up with prices which is why many can’t even make it on 2 incomes. Eliminate the minimum wage and get us back to sound money. Then let the market determine wages.
David

Do you have any proof of that?
Anonymous

May I draw your attention to Bob Dog’s usage of the word “suspect?”
Anonymous

This is good, but I think there is actually much more compelling empirical data for arguing against the minimum wage which aids the airtight logical argument. Now, I realize that one can’t prove logical deduction through empiricism, but the correlation of higher min wages and rising youth unemployment is quite strong. Bob Murphy has recently put up some good posts illustrating this using empirical data: http://consultingbyrpm.com/blog/2013/02/even-more-thoughts-on-the-minimum-wage.html and http://consultingbyrpm.com/blog/2013/02/i-get-empirical-on-minimum-wage.html.

1. Over the past 10 years, each increase in the federal minimum wage is preceded by an increase in the gap between teenage unemployment and overall unemployment.

2. Another study showing teenage joblessness and min wage laws show that 6 of the 8 states with the highest teenage unemployment rate have a min wage greater than the federal level. Whereas, 13 of the 14 states with the lowest teenage unemployment rate either have no min wage law or one that is less than the federal level.

Also, while I don’t have the exact numbers offhand, the min wage is temporary where the number of min wage workers who do not remain at min wage for greater than one year is quite high (I believe around 60%).

Even when looking at other countries, the correlation is strong. A good example that always comes up with min wage law advocates is the case of Australia which mandates a $16.50/hr min wage. These advocates will then point to Australia’s overall unemployment rate of 5.4% and claim success. However, the country has one of the widest gaps between youth unemployment and overall unemployment among the industrial world. The teenage unemployment rate continues to surge from 18% as of late 2011 to over 23% now! That’s more than 4x the overall unemployment rate. It will be interesting to see what the Australian employment picture looks like over the course of the next several years as more and more individuals are being denied a chance to acquire skills and earn money at a young age.

This all then ties back neatly into the logical argument about setting a price floor above the market clearing level which reduces the total number of buyers (ie employers) and disproportionately hurts those workers at the margin (ie low-skilled, young workers) whose perceived marginal productivity is less than the price for that labor. A simple Supply/Demand curve further illustrates this with quantity of labor/workers along the Y-axis and wage rates along the X-axis and drawing two horizontal lines: one at the point of intersection of the two curves and an arbitrary line above it. The gap between the points at which the higher horizontal line intersects with the supply and demand curve quantifies those hours/workers being disemployed.

There’s also the moral argument about criminalizing employers who are willing to hire those individuals who voluntarily and freely offer their labor at a price lower than a govt mandated minimum.

In short, *both* the logical and empirical argument against the minimum wage are just too compelling. Unfortunately, appeals to emotion and propaganda make communicating this to the general public an arduous task.
http://twitter.com/vpostman Kevin Daley

Thomas Sowell in Basic Economics defends this idea even more succinctly: “The real minimum wage is always zero.”
actionexpres

Brilliant answer and couldn’t agree more. In 1940 an oz of gold was $35. One could buy a VERY nice suit for $35. Today an oz of gold is $1,600. One can buy a VERY nice suit for $1,600. What has changed? The gold? The suit? Or the junk paper?
Anonymous

It’s been that way throughout history. If one could go back to ancient Rome, you’d get the same results. 1 oz of gold would buy a very nice outfit for the time, just like it does today.

This is why you look back to the 40s, 50s, 60s and even the 70s and you see that 1 income households were the norm. People could afford to live on 1 income and raise a family. Once Nixon took us off the gold standard completely, that all changed. By the 80s you started to see more and more 2 income households… and by the 90s… 2 incomes were the norm. What happens when 2 incomes will no longer be enough?
Phenry

I vote:
C. The Junk Paper

Federal reserve for the lose!