Wednesday, August 21, 2013


Once more we are witnessing displeasure with the minimum wage. Low-wage fast-food and retail workers from eight cities who staged walkouts earlier this year are calling for a national day of strikes on August 29. The workers are calling for a wage of $15 an hour and the right to form a union.

Is a minimum wage good or bad for the U.S. economy? Free-market adherents believe that there should be no minimum wage at all. According to this view, employers should offer wages that cover their marginal costs, and they should only raise wages when it is necessary to attract or retain high-quality workers. Employers should not have to pay their workers an arbitrary minimum wage set by the government. On the other hand, those who believe in the value of a minimum wage argue that employers are obligated to pay wages that afford workers a "decent" living.

What would happen if the minimum wage was eliminated? Various local labor markets would eventually find the equilibrium wage that clears the market for job-seekers. Some of those wage rates would be lower than the current federal rate ($7.25 an hour), and some would be higher. Would the new wage rates afford workers a decent living? Not according to Barbara Ehrenreich, author of Nickel and Dimed: On (Not) Getting By in America. She spent a year working in low-wage jobs for the likes of McDonald's and Walmart, learning first-hand that you cannot afford rent, food, child care, health care, and the other necessities of life by working full-time for minimum wages.

What would happen if the minimum wage was raised to $15 an hour, as the fast-food and retail workers are presently asking? Employers might be able to hire better workers and thus reduce the costs of hiring, training, and turnover. Inevitably, however, employers would have to adjust by raising the price of their products and services, lowering operating costs such as purchasing better equipment or reducing the salaries of top-level managers, and/or accepting lower profits. None of those actions would hurt companies as much as the minimum wage hurts employees.

So what should happen with the minimum wage? My conclusion is that it should be raised -- at least for companies of a certain size. At $15 an hour, annual income would be approximately $31,200 which is about $8,000 above the federal poverty line for a family of four. Of course, being above the poverty line does not assure that a wage earner and his or her family enjoy a decent living. Annual income in San Francisco, the city with the highest minimum wage rate at $10.55 an hour, falls below the federal poverty line. Thus, the minimum wage helps to ameliorate the social problems associated with income inequality in the U.S., but the current rate is far below what it needs to be in order to make a significant difference.

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