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The Minimum Wage

  1. Jan 24, 2008 #1
    As you've probably noticed I'm generally a critic of most forms of government intervention in both peoples' personal lives and their economic lives. I guess that's what makes me a libertarian.:smile: Many times this point of view causes me to get in disagreements, discussions, arguments, debates, or whatever you want to call them with others, partially because my position is in the minority, and therefore others often disagree with me. I guess you could say I'm a "radical."

    Often times these discussions/debates center around economic policy/regulation. (I guess I rarely get in arguments about liberty in regards to personal views, because a lot of folks probably share many of my ideas about invidual/personal/social freedom and liberty.) The person on the other end of the discussion often states something like the following, "Look, one reason we need government to intervene in our economic system is because employees and employers don't have the same power and therefore don't have the same bargaining position. Therefore, the workers will usually get screwed over when making deals with their superiors. One way to solve this problem is by giving employees some additional bargaining power, or by taking some away from the employers."

    I'll admit, the argument sounds plausible. In effect, the person has just stated a theory. And we could derive (and then test) a hypothesis that's congruent with this theory, that states, "many employees would pay less than the minimum wage if it were legal, and therefore the minimum wage raises the wages of many workers." If this hypothesis was true, we would also expect that many individuals would earn exactly the minimum wage, because there's no reason for the employers to pay more than minimum wage (after all, they're already obeying the law, and as many have pointed out business owners, managers, etc are self-interested (some might say greedy)). Therefore, one hypothesis that comes from this plausibe theory is "many people will earn the minimum wage." Since it is a hypothesis, we don't really know whether it's true or not, and therefore we need to test it.

    I have often asked many of the people I'm debating with, "If businesses are so powerful and have so much control over peoples wages, then why do so few people make minimum wage?" The funny thing, is that I've asked this question about 5 - 10 times on my short time on this forum, and I can't remember anyone actually answering it. Nobody's even took a stab at it, by trying to explain how this could be (although it does put a dent in their theory).

    I was just reading an blog article on the minimum wage. The writer of the blog is an academic economist, and just out of personal curiousity he often surveys his students and people he gives presentations to, asking them "what percentage of the work force makes the minimum wage?" The median survey result is that 20% of the work force makes the minimum wage, in reality the number is closer to 2.2% (that's a big difference). Interestingly, approximately 98% of the work force earns above the minimum wage. Furthermore, of the small percentage of people who actually make the minimum wage, approximately 75% of them work in the service industry, meaning that a good chunk of them earn tips. Minimum wage earners make up a very small proportion of the work force, and the average minimum wage earner's "take-home" wage is probably above the minimum wage.

    I attached the blog articles below so you won't have to go to the website (cafehayek):

     
    Last edited: Jan 24, 2008
  2. jcsd
  3. Jan 24, 2008 #2

    Evo

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    The reason that most people do not earn minimum wage is because employers have to pay more to attract people with the skill sets they need. Supply and demand is another factor. I remember 20 years ago in Atlanta, there was such a shortage of unskilled labor that McDonalds was advertising starting pay at $9/hour for workers.

    Perhaps people haven't bothered answering this because it is such a no-brainer.
     
  4. Jan 24, 2008 #3
    This would be more meaningful if it were the number of people earning the minimum wage in the state in which they work.
     
  5. Jan 24, 2008 #4

    Art

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    In the UK 1.3 million workers rely on increases in the minimum wage for a pay rise. These are the same 1.3 million who were earning below the minimum wage when it was first introduced in 1999 in the face of frantic appeals by the employers' representatives, the CBI, who forecast dire consequences of businesses folding and unemployment rocketing if a minimum wage was introduced.

    Not too surprisingly it transpired the CBI's concerns proved to be somewhat overstated with unemployment actually falling despite the minimum wage being increased by > inflation each year since it's introduction.

    The UK's minimum wage currently stands at approx double that of the US's so perhaps the reason not so many people in the US are paid the minimum wage is simply because it is ridiculously low. Despite this 1.3% of the US population only earn the minimum wage compared with 1.8% (4.4% of the workforce) with a further 1.2% earning less than the minimum wage due to exemptions etc. in the UK and (contrary to what one would expect if France was the bastion of socialism some claim) France 16.8%. http://www.personneltoday.com/artic...e-is-double-us-rate-and-third-highest-in.html http://www.statistics.gov.uk/cci/nugget.asp?id=12
     
    Last edited: Jan 24, 2008
  6. Jan 24, 2008 #5

    jim mcnamara

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    These types of discussions are just like Math: take a set of assumptions, work proofs against them and you always arrive at the same set of theorems (true statements).

    So let's step outside and see what an assumption is like:
    Depending on your ethics - your sense of right and wrong - do all able bodied people deserve a chance to feed and house themselves and their families? I say 'yes'. My opinion - or an operating assumption.

    Libertarians essentially reject this notion - the free market solves all problems instead. To which I would answer 'visit India' where they do not have the above assumption. India does not have much of a middle class, and it is a great place to wheel and deal.

    The issue with Economics as a discipline is that, like Math, you get out predictably what you put in your model. An example of this is the fact that many trained economists have very diverse views on the impact of something simple like tax reduction. If all of Economics were not dabbled with what I think are undeclared assumptions, then would this diversity of opinion persist? I think it would not.

    This, by the way, is precisely what Evo said. It's a no-brainer. You get what you start with. Your undeclared assumptions direct your logic to a fore-ordained result. It's kinda like Calvinism for the investor class. Give it a rest.
     
  7. Jan 24, 2008 #6
    I agree with your first paragraph, but the second one is doubtful. The exact people I ask the question to say that wages are mainly determined by corporate power and greed. I agree with your statement above that what determines wages is supply and demand (which is afterall my whole point).

    I thought they did look at states? If they didn't then you bring up a valid point. Even then though, minimum wage workers make up a very small percentage of workers. And even then, it's almost always young workers who haven't accumulated much human capital, which is a big part of a reason why they are working at such a job.

    Do you doubt that the minimum wage made it more difficult for people to find work? Sometimes the unemployment rate might not tell the whole story. For example, by making low skilled jobs more attractive, the competition for such jobs has increased. This often leads to many displaced low skilled workers, because middle skilled workers will now strive after those jobs (because they're more attractive). This generally has disproportional adverse effects on groups of people who tend to be low skilled, such as, uneducated workers, poor people, young workers, and minorities. In other words, you may have changed the composition of the average minimum wage earner (or put differently, the unemployment rate may not have changed much, although the composition of those umemployed may have changed).

    This is a pretty informative article on minimum wage (and Earned Income Tax Credit) in the US: http://www.epionline.org/studies/epi_eitc_05-2004.pdf

    By the way, I do agree with you that often times certain people/groups will overstate the degree to which minimum wage legislation will increase the official unemployment rate. I'm not sure whether they do this because of a miscalculation or more intentionally due to a political reason/agenda (although I'd guess it's the latter, but maybe I'm mistaken). My whole point is that unemployment rates probably don't capture the whole story when it comes to the adverse effects of minimum wage legislation.

    I don't know any libertarians who actually understand economics, and say "The free market solves everything!" What they do say is that it does a better job at problem solving than government, due to better incentives, more flexibility, dispersed knowledge, and decentralized decision making. They also say that we should be skeptical about the powers that government possesses, because as history has shown centralized power in the hands of few often leads to disastrous consequences. However, this is not the point of this thread, so I do not wish to discuss it. If you'd like to continue discussing this, start another post and I will be sure to read and respond to it.

    My understanding is that India is not the most free-market place. In fact, I heard it takes an extremely long time for government to grant people permits, licenses, etc, to open up small businesses. With that said, I'm also under the impression that they are becoming increasingly more capitalistic, and that this has lifted millions of people out of poverty. Again though, that is not exactly the point of this thread.

    Actually you're missing a key element. Economics is a positive science, meaning we try and explain how things are as opposed to what should be. A big reason that people have such different opinions is because in order to forumulate an opinion you generally have to include normative judgements (or if you prefer the term, value judgements). It is very common that two economists will share the same positive outlook but very different normative outlooks. For example, two economists may believe that increases in the minimum wage increase unemployment. However, one economist may believe that we should still support minimum wage legislation because the gain to the winners is more important than the losses to the losers. The other economist may believe that it is not the governments place to decide how much employers should pay employees. Again notice the stark distinction, they share the same positive outlook on the outcomes of a minimum wage hike on umemployment, yet their value judgements and policy perscriptions are completely different.

    By the way, there is still a lot of debate in economics over the positive aspects of "what is." That should not be suprising considering that all sciences have debates over positive aspects, and in fact, the only way the science advances is through this sort of process. However, there is generally more agreement over the positive aspects than there is disagreement over the positive aspects (at least in microeconomics).

    jim mcnamara - I think you bring up many good points, but they just seemed off topic for a discussion on the minimum wage. I just want to keep the discussion focused on the minimum wage, at least temprorarily and then we can come back to these other issues. Or if you prefer we could start a new thread and discuss them there.
     
    Last edited: Jan 24, 2008
  8. Jan 24, 2008 #7
    The line I quoted said specifically, 409,000 people earn $5.15, the federal minimum.
    Here is a site that explains why the number is meaningless. And therefore the 2.2% percent figure that goes with it is also meaningless.
    State minimum wages
     
    Last edited: Jan 24, 2008
  9. Jan 24, 2008 #8
    I don't know if I'd go as far as to say they're "meaningless." Besides even in the states with a minimum wage below $5.15 an hour (which includes 18 states) over 96% of the states population earns above $5.15 an hour. Here, I attached that part again below.

     
  10. Jan 24, 2008 #9
    This is such BS. "More than minimum wage" can mean 1 cent more. When the minimum wage over here was $7.50, I was making $8.00. Guess what? That's still not enough to make a living.
     
  11. Jan 24, 2008 #10
    What's your point? If an employer didn't have to pay you 1 cent more, than why would they? Or in your case, if your employer didn't have to pay you 50 cents more, than why would they?

    The point is, wages are determined by supply and demand. In other words, neither you nor your employer really "choose" the wage (just like neither you nor Safeway really "choose" the price of bread). Therefore, all these claims about business power and corporate greed being responsible for low wages is the real BS.

    The truth is, if people are low paid, it's generally because they are low skilled, and therefore, others don't really value their skills and productivity very highly. It may be sad, but there's not a lot anyone (even government) can do about that fact. Furthermore, many of these low-skilled people are on their way up to higher paying jobs, because often times they are investing in their human capital (either through education, on the job training, or plain-old work experience).
     
    Last edited: Jan 24, 2008
  12. Jan 24, 2008 #11

    Art

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    I disagree entirely with your speculation. The minimum wage level is set far too low to attract skilled workers into unskilled jobs which as I pointed out in another thread they probably wouldn't get anyway and the unemployment figures back up the contention a minimum wage is not bad for the economy. Whichever way you cut it lower unemployment which equates to a smaller pool of unemployed workers means more unskilled people are finding jobs unless you're suggesting the skilled workers were the majority of the unemployed which in this day and age of ever higher skilled jobs doesn't make a lot of sense.

    The article you quote makes some rather nonsensical assertions to arrive at it's conclusions. It assumes all income coming into a household is pooled and so individual incomes are irrelevant, How many households do you know that operate like this? Seems like a very left-wing communist style assumption to me. Personally I see each person as standing on their own. An eighteen year old trying to put himself through college is not going to be satisfied to work for a pittance because his parents happen to be well paid. At least not unless his parents give him their PIN no and bank card :biggrin:
    Why not extend this principle so if your neighbour is well off then it is okay to pay you a pittance or why not if you know anybody who earns a decent wage then you can have a pittance.

    The article is also self-contradictory. It goes to great lengths to say how few people need or are affected by the minimum wage and yet it is on a crusade to abolish it. Why?? If it's an irrelevancy then why does it need abolishing??

    It also makes totally fabricated (or just incredibly mis/uninformed) claims such as
    Duh! only unexplainable if your knowledge of economics doesn't extend to the most basic models such as the multiplier effect. In fact increasing the income in the lowest income groups is the best possible way to stimulate domestic economic growth as they are more likely to spend their income on necessaries produced locally rather than on luxury items imported from abroad.

    Which btw is why if you want to stimulate the economy you get a far bigger bang for your buck if you reduce taxation for the lowest paid rather than the highest paid. $50,000 shared between lots of the lowest earners and spent in their local shops and on local services does a lot more for the economy than one top earner buying himself a BMW!
     
    Last edited: Jan 24, 2008
  13. Jan 24, 2008 #12

    Art

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    I'll answer that one. It's for marketing reasons. Employers are worried their brand and reputation will suffer if they are classed as minimum wage employers. If there was no minimum wage they wouldn't have to worry about that and could pay less. When a minimum wage was introduced in Ireland a major corporation I worked for gave all their operatives a pay rise to bring their hourly rate a few cents over the minimum for that very reason.
     
    Last edited: Jan 24, 2008
  14. Jan 24, 2008 #13
    I disagree about corporate greed. I think if CEO and senior executive golden parachutes were not so huge all workers could be paid more or that money could be reinvested into the business (not the individual) and that would likely result in growth and the opportunity to pay workers more.
     
  15. Jan 24, 2008 #14
    I would. Here in NJ, the minimum wage is $7.15. We don't contribute to the numerator in the 2.2% figure, but are still found in the denominator. That makes the figure quite meaningless.
     
  16. Jan 24, 2008 #15
    Walter Williams points out that employment rates used to be similar between yound african americans and young whites, even going back to times with much more racism and discrimination. He then points out how the difference between the unemployment rates of these 2 groups changed with hikes in minimum wage laws. I don't know if the unemployment figures captured any of this considering that you probably have some people who weren't looking for jobs who were after the hike. Likewise, you'll also have discouraged workers who won't be looking for jobs because they're unlikely to get them. Walter Williams also points out the ways in which minimum wage laws were used during Aparteid in South Africa, precisely by white unions to make low skilled blacks less employable.

    How exactly does what you're saying explain this?

    By the way, I'm not saying all kinds of highly skilled workers would flow to low skilled jobs because of the minimum wage. All I'm saying is that some workers on the margin probably would.

    My understanding is that there is still some debate over the significance of the multiplier effect. Essentially, the money has to come from somewhere in the first place (namely taxes) and therefore what would have been spent by one group is transferred for another group to spend. This also misses the fact that some people who are taxed more might work less because their marginal tax rate has increased. Not to mention, I don't know what buying abroad vs buying at home has to do with anything. Many economists have claimed that "trade deficits" are completely meaningless statistics. Not to mention even if "the poor" spent their money locally like you state, why wouldn't the next person just spend it on imports. Or even if someone spent the money on imports, who's not to say the foreigner would buy or invest in America. In other words, your speculation about the way that people would spend the money, and the results of such actions seem like they're unbacked.

    Could be. But maybe it's for other reasons as well. I mean, my mom works at JCPenny's and she makes minimum wage. Are you saying that JCPenny's doesn't care about it's reputation? It seems that your analysis is probably an ad hoc explanation, and lacks predictive power. Besides, how much above the minimum wage to you pay for this image? 1 cent, 50 cents, 1 dollar, 5 dollars?

    You're also forgetting that some of the literature on the minimum wage states that companies actually will pay some people higher wages if there is a minimum wage. Essentially though, this literature says it will not make the lowest skilled people better off, but rather the people slightly above them. For example, if you have a low skilled/productive worker that you can hire for $5 and a medium skilled/productive worker that you could hire for $10, you might hire the low skilled and you might hire the mid skilled (it depends on the situation). But if there's a minimum wage of $8, you're much more likely to hire the middle skilled/productive worker. Essentially, minimum wage legislation actually might make some peoples wages rise, however it will likely make other (lower skilled, less educated, poorer) people unemployable.

    The reason companies have "golden parachutes" is because it can actually be cheaper in many circumstances. CEOs will leave without as much fuss if they are compensated to leave. If you don't have "golden parachutes" you'll have a lot more lawsuits and what not. In other words, companies are still acting in there self interest by providing these "golden parachutes."

    More importantly, what CEOs are paid has nothing to do with what employees are paid. If companies quit offering golden parachutes, or decided to pay CEOs less (or even if they were required to by law), you wouldn't see employees salaries rise. The two things are completely unrelated. This is like saying Safeway would drop prices if their rent was dropped (which is not true). Why would they? They are charging the price of food which maximizes their profits, and a change in rent would not affect this profit maximizing price (for those of you who've taken some econ, it comes down to difference between marginal cost and fixed cost). If I gave you $50,000, would you go to work tomorrow and tell your boss you're willing to work for less? If a company saves $1 million dollars on a CEO, why would they turn around and give this money to their employees? Why not just keep it for themselves?

    Ok, so you're saying that in NJ the amount of people earning the state minimum wage of $7.15 is much greater than 2.2%. Want to wager a guess on how high the number will be in NJ?
     
    Last edited: Jan 24, 2008
  17. Jan 24, 2008 #16
    I didn't say that. I don't know what the figure would be. But when I got to that part of the article I knew that it was ill considered and I stopped reading it.
     
  18. Jan 24, 2008 #17
    I would be willing to bet that minimum wage earners probably don't make up 5% of the employees in any state. I seriously would be willing to bet on this (which obviously doesn't mean I'm right). This is not the first article I've read that pointed out how small of a proportion minimum wage earners make in our economy. Furthermore, some of these studies are more likely to overestimate the percentage of people earning a minimum wage because many employees are on salary (and it's even more rare to find salary employees who have a wage that is that low).
     
  19. Jan 24, 2008 #18
    The article later quotes the statistic for states without higher than federal minimum wage.

     
  20. Jan 24, 2008 #19
    I think a mandated minimum wage is almost meaningless other than being a reference point. It's simple to me, if a job pays too low, don't work there. If a job position doesn't get applicants it has to raise it's wage until it does. If we tripled (for example) the minimum wage, what would that do? It would shut down entire industries. It would reward people NOT to advance their job skills and education. That's true evil in my opinion.

    Noone with any skill, education, or common sense is going to stay at a job that pays minimum wage. You can't raise a family on it. You can hardly pay your mother rent if you live in her basement. Those positions are basically for kids to get experience at being employed somewhere. Or for elderly to supplement their income and have something to do.

    Very few places offer minimum wage anyhow because people simply won't work for it.
     
  21. Jan 24, 2008 #20
    I think one of the reasons for keeping the minimum wage laws are to prevent exploitation of the young and elderly.
     
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