One of the arguments against raising the minimum wage is that employers won’t hire people if the wage is higher than the value of the employee’s work.
Obviously this principle is true. In fact, an employer will not hire someone unless the wage is less than the value of the employee’s work to the employer. Otherwise the employer would make no profit.
Under conditions of economic competition, there is pressure to keep wages as low as possible. This is especially true for franchise and subcontract businesses, when the franchisers and the buyers have the economic power to squeeze their profit margins as low as possible.
Workers have no power, as separate individuals, to prevent wages from being forced down to subsistence level. There’s a name for this process, the Iron Law of Wages, which was formulated by the economist David Ricardo 300 years ago.
The reason that, contrary to Ricardo, wages have risen over the century is that sometimes skilled workers are scarce and command a higher wage, sometimes workers have been able to organize unions and bargain collectively, and sometimes governments have set minimum wages to limit how far wages can be pushed down.
Certain libertarians and free-market theorists oppose a role for government or even for labor unions. They say wages should be negotiated between free individuals. When an individual business owner is hiring an individual worker, that may make sense.
When a worker is up against a powerful collective organization, such as a corporation, then the worker needs something to equalize bargaining power. And in the case of fast-food franchises, workers are not up against the individual business owners. They are up against the corporations that set the terms for the franchisees. A higher federal minimum wage would change the equation.
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Click on Raising the federal minimum wage to $10.10 would give working families, and the overall economy, a boost for the full report from the Economic Policy Institute.
Click on David Ricardo for an Encyclopedia Britannica article on the author of the Iron Law of Wages.
Tags: Fast-Food Franchises, Iron Law of Wages, Low Wage Workers, Profits and wages, Workers
September 4, 2013 at 6:37 am |
Sadly this article does little to overcome a fundamental law of economics: the law of demand. It’s odd to watch seemingly intelligent people twist economic theory into pretzels trying to against principles you learn in Economics 101.
BTW… the last time the United States raised the minimum wage teenage employment went down..
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September 4, 2013 at 6:57 am |
Common sense suggests that a business owner will pay whatever he or she needs to pay for whatever they need to stay in business, up to the point where costs make it impossible to stay in business.
I agree that in theory it is possible to raise minimum wages to a level where that happens. Research shows this doesn’t happen to any detectible degree within the range of actual minimum wage increases in the United States.
http://www.slate.com/blogs/moneybox/2013/02/13/minimum_wage_research_the_case_for_a_higher_minimum_wage.html
http://robertvienneau.blogspot.com/2011/03/card-and-kruegers-research-on-minimum.html
http://www.huffingtonpost.com/peter-dreier/raising-the-minimum-wage-_b_2750336.html
One thing economists have done is to compare employment in continguous counties of states that have different minimum wages. Presumably they are similar except for the difference in minimum wage. Whatever effect the difference in minimum wage, it is too small to show up in the employment statistics.
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September 4, 2013 at 7:06 am
The recent research you cited above doesn’t change the fact that the last time the minimum wage was raised there was a significant increase in teenage unemployment. The reason the minimum wage doesn’t destroy the economy (which is basically what these studies indicate) is because very few people are actually paid minimum wage.
Common sense is the law of demand. This is all intellectual maleficence by individuals who refuse to believe in the fundamental laws of economics. Just because the law of demand interferes with your worldview doesn’t mean it’s wrong.
These people are a disgrace to the field of economics.
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September 4, 2013 at 8:28 am |
@ Henshaw: The last time we raised the federal minimum wage was in 2007, 2008, and 2009, in the midst of the Great Recession. Of /course/ teenage unemployment was going up then – it was the worst economic downturn since the 1930s. Unemployment rates for all ages and wage levels were increasing.
Do you have any evidence whatsoever that increasing the minimum wage had anything at all to do with that?
Labor economists – experts on wages and employment – haven’t found any clear relationship between minimum wage levels and unemployment rates. One famous paper even found that raising the minimum wage appeared to /decrease/ unemployment.
Please don’t spread uninformed opinion as if it were fact.
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September 6, 2013 at 3:27 pm |
Perhaps if we called corporate boards “capital unions” it’d show the real position labor is up against.
As for the minimum wage, if one is going to even bother trying to have a wage floor, it’d make more sense to explicitly index it to inflation, so as to not have that floor become quicksand. I see it as a kludge though overall, an intervention meant to counter previous intervention that people these days tend to not see. Widespread as the strikes have been, picture the impact in an environment that didn’t have bans on sympathy, secondary or “wildcat” strikes. I imagine wage growth would make a return pretty quick if maintaining the status quo meant industry-wide shutdowns…
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September 6, 2013 at 3:45 pm |
Absolutely right! We have “right to work” laws and we also have laws that, in the situations you mention, deny the right not to work.
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