Minimum Wage – Maximum Benefit

The overall intent of a minimum wage is combat the economic imbalances in society and raise the standard of living, in particular for the lowest income sections of the population. A further proposed benefit is re-dressing the potential to financially exploit staff in an employer's market. Many business owners, corporate policies and individuals oppose this, on the basis of maximising profits and minimising governmental interference. They argue that not only is having a minimum wage ineffective in its stated ends but that it can actually harm the less well-off, in terms of their incomes and employment prospects. But is this top level approach short-sighted? Can a government-mandated minimum wage for individual staff members actually help business? I would argue that, yes, a minimum wage not only can help business but does, as well as being socially beneficial in general.

My thesis is that impoverished people don't spend. If you enrich people at the lowest incomes, they will consume more, enlarge the economy and create more demand for goods and services, which in turn drives business and provides employment. 

Many online articles make use of a graph similar to that below. I don't fully accept the assumptions on which this graph is based. Specifically, the 'demand' shown is the demand of business for employees. In this context, businesses are a middle tier between the goods and services created by the employees and the consumers. It is consumer demand that is the important factor here and this is referred to in some of these articles when they talk about 'elastic demand'. Consumer demand will drop, for some products, if the price is too high but, as I say, enriching the worse off will increase demand overall. Even decreases in employer demand have their limits. Ultimately, goods and services are created by employees. If a company sheds staff, it decreases its profits, potentially creating a downward spiral which ends in the business ceasing to exist at all.

Some frequently given objections to having a minimum wage:

"Raising the minimum wage makes it harder for these inexperienced workers to find a job, because businesses will either eliminate positions or choose to hire someone with more experience at the higher mandated wage." If a business can afford to pay a decent wage, naturally they will choose to hire the more talented worker, regardless of whether a minimum wage is in place.  In addition, this thinking doesn't take into the existence of a skills gap. These "experienced workers" often don't exist, not for the wages that the companies want to pay. Corporate employment policies have to reflect the job market as it actually is, not as they would wish it to be. Of course, you can educate to fill a skills gap. But at some level that education has to be paid for. If it is state funded, the state has to tax business in order to fund it. If it is funded by the individual, only the well-off can afford it, and it doesn't benefit those on a lower income. There are other solutions, such as corporate training schemes, for example, but in essence, the funding has to come from somewhere in the economy. That basically comes down to either the individual or the private sector, or a combination of both.

"'When I was a kid and you ordered a soda, a person had to stand with their finger on the button til the glass filled up, ' he said. 'And now in many of the fast food restaurants of course they've completely eliminated any labour involved with pouring the soda.'" ... "He argues that if a company has to pay people more, they'll find ways to pay fewer people." This is short-sighted, on the face of it. Any corporation above a certain level will always try to innovate in order to reduce costs. The existence of a minimum wage makes no more impact on this desire than any other cost of doing business.

"A minimum wage cannot defeat supply and demand." The market is, to a degree, an evolutionary environment. As far as business is concerned, government legislation is part of that environment. (Lobbying aside.) Those companies which are able to adapt to the change and accept a minimum wage as a necessary cost of doing business will survive and indeed prosper in the absence of those which cannot. Either way, the labour force won't die with the failed companies, they'll still have the ability to be employed by the companies that do survive. Any company which requires legislation to be set in stone in order to survive might as well be wearing a t-shirt saying 'I'm a dinosaur. Please meteor me.'

 There is also an argument that setting a minimum wage drives labour to the black market. These arguments neglect to mention that, in circumstances of low wages and welfare provision (such as in the United States), there is already a large shift towards illegal work, particularly in the drugs trade. If you can't survive on welfare or even if there is employment to be had but it doesn't provide enough for a basic minimum, your alternatives are crime or starvation. Faced with that choice, it's little wonder that the States has the gun crime problem it does, with the laissez-faire economics of the black market allowing murder as a tactic for reducing competition. The alternative that is being suggested is that, rather than run the risk that employers may turn to crime in order to pay a sub-standard wage to their workers, we should allow them to legally pay a wage that cannot support a basic standard of living. The same arguments could be, and are, used to propose the abolition of health and safety legislation and all forms of corporate responsibility, both to the employee and to society. Of course, no form of truly free market economy, ungoverned by any legislation, has ever historically existed, and there is no realistic prospect of one being created in the foreseeable future.

A minimum wage provides an incentive to get off welfare and into paid employment. This is not so apparent when welfare is also at a low level. If you raise the minimum wage, you can then raise welfare proportionately, thus raising the general standard of living and allowing a greater proportion of society to contribute to the economy.

Imposing a minimum wage may make it less profitable for an individual company to employ someone. However, it won't make the demand for that person's labour go away. Indeed, what a healthy economy absolutely cannot afford to have is a large pool of disenfranchised people who can't afford goods and services. So mandating a living wage for everyone will increase consumption and boost the economy. Even if one company is forced to lay off staff, the increase in demand for labour overall should mean that they should be able to find employment elsewhere, and thus still be able to contribute economically.

You can download the Minimum Wage – Maximum Benefit article as a printable PDF file.