Minimum Wage

These days there is a lot of discussion in the United States as to whether there should be a nation-wide increase on the federally mandated minimum wage. Currently, the federal minimum wage stands at $7.25. There are proposals currently from various quarters to increase that amount to $10.10. There are also proposals from some to take that amount up to $15.50 within the next five to ten years.

The minimum wage concept is something that I am still trying to get my head around and understand its effects better. I might be willing to change my opinion as I learn more but for now, I don’t believe there should be a minimum wage concept at all. Yes, companies like Walmart who earn billions in dollars annually should increase the pay to their employees well above the minimum wage. But what about a working family who hires a nanny at the minimum wage to care for their babies when the family is out working to earn bread and butter? An increase in the minimum wage of Walmart employees may at best reduce their corporate profits. But an increase in the minimum wage of the nanny in my example would probably result in reduced working hours for the nanny or an outright prevention of using any nannies to care for their babies or at the least, an increased financial stress for the working family. So the situation of individual businesses and families differ greatly and in my view, the wages of the employees is best handled through the markets (supply and demand).

I understand the side of the argument where some experts say that putting more cash at the hands of the people who are at the lower end of the economic spectrum will generate more economic activity in the region. And I also understand and strongly believe in the argument that anyone who works 40 hours a week should not live in poverty. But increasing the minimum wage, in my view, is a flawed way to eliminate poverty. If you look closely, most of the businesses that depend largely on minimum wage employees are businesses that cater to the middle class. An outright increase in the minimum wage to all employees will undoubtedly tempt the businesses to transfer some of that cost to the consumers – who, as I said, are mostly middle income earners. The business itself would only transfer a partial amount of that cost from its profits. In essence, those calling for an increase in the minimum wage fail to see that this increase would result in a transfer of a large part of the financial wealth from the middle income earners to low income earners and not necessarily from the high-income earners to the low-income earners.

A large part of today’s economic perils could easily be ascribed to the lack of sufficient demand.  And demand itself is best created when both the middle-income earners and low-income earners have more disposable income. An increase in the minimum wage, in my view, greatly reduces the disposable income of the middle-income earners.

The best way to increase the wages of low-income earners (or minimum wage earners) is to move people out of those minimum wage jobs and into semi-skilled and higher-skilled jobs. When the supply dwindles, businesses will raise the wages to match with their demand much more efficiently than the government passing an arbitrary number by decree.

How to move people from minimum wage jobs to semi-skilled and higher-skilled jobs? – this is altogether a different analysis which I will try to cover in my later posts (or let the experts work it out).