Minimum Wage and Fairness

In a free-market economy, wouldn't employees be paid less than the minimum wage?

The best way to answer that question is to begin by asking a question. What is it that keeps wages that are now above the minimum wage from falling to the minimum wage? Why, for example, do McDonald’s restaurants in the Grand Rapids area pay roughly $8.00 an hour, instead of today's government-mandated minimum wage? The answer is simple: The market has determined that the current forces of mobility, productivity, and competition for the talents of many low-skilled workers exceed the wage determined by government.

Minimum wage laws may very well be the most anti-poor laws envisioned by modern government policymakers. If a minimum wage is set by government at $5 an hour, but a worker's skills are valued by an employer at $3 an hour, the difference between the two is effectively an hourly bonus that many "mom and pop" shops simply can't afford. Sadly, for low-skilled workers it is not easy to find jobs that can afford mandated (higher than market) wages. In order for a job to be created, there needs to be something done that an employer is willing to pay to have done. If the value the employer has placed on that work falls below what the government says it is worth (the minimum wage), the employer may simply not hire anybody. A job that would otherwise have been created is lost.

Still, many people believe that minimum wage laws are beneficial. Most of these people will not lose their employment when wages are raised because they make more than the government-mandated minimum. But everything has a cost, and in the arena of minimum wage, that cost falls disproportionately on two groups: the poor and the young.

In the case of the poor, many of whom are minorities, they suffer because of the inverse relationship between price and quantity demanded. As the price of something rises, people tend to demand less of that thing. Similarly, when the price of the least-skilled workers of society increases (their wages), employers demand fewer of them.

The other group, the young, forms the overwhelming majority of minimum wage earners. They tend to be first-time workers who live with their parents and who work mainly to pocket extra spending money for school and summer fun, and to develop a work ethic. The minimum wage often "prices them out of the market" through the process described above. In fact, U.S. Labor Department statistics show that the last minimum wage increase in 1996 threw about 20,000 youngsters out of work in Detroit alone.

Another way to examine the issue of what would happen is by looking at the pockets of America where wages most often do fall below the "minimum" set by government. It happens in areas that are replete with productive, largely entrepreneurial, and illegal immigrants.

I stress the term "illegal" because it is key to understanding why many of them operate in a special marketplace that is largely unburdened by government. If they want to stay, they must engage in black market activity--illegal activity. Why is it illegal? Because they work for less than the minimum wage, avoid social security payments and other taxes (except sales tax when they consume), and personally decide what workplaces are and are not safe--instead of waiting for the Occupational, Safety, and Health Administration to do it for them.

Are the immigrants worse off? No. On the whole, for them it is superior to their alternatives. That's why they continue to flood cities like New York. That is not to say it is ideal, or that immigrants would not want to make more than half of the legal minimum wage if they could. However, it is a comparatively superior arrangement that allows many of them the opportunity to earn hourly (though illegal, and about half the American "minimum") than they earn daily in Mexico, Brazil, or Senegal.

What has been the result? In many immigrant-dense New York communities, competition for jobs and customers is so intense that a local-only decrease in price for many products and services is occurring. Here are some examples:

  • At selected New York payphones, you can still make a call for ten cents.

  • Some neighborhoods boast $2.95 all-you-can-eat buffets.

  • In Manhattan, you can place a call to anywhere in the U.S. for about 30 cents, and some call run as much as 200% cheaper than other parts of the U.S..

  • Illegal "jitney" services (vans and their drivers running illegally) deliver passengers faster, more efficiently, and 50 cents cheaper than municipal busing.

(For more on the above points, I suggest reading The Other Americans by Joel Millman.)

Most of the immigrants who work for less than the American minimum wage recognize that they’re just sitting on the first rung of the ladder and will move up as they learn English.

One side note to all this is the "dollarization" of the world. Making less than the American minimum is still attractive enough to the people of the world that they would continue to send us their sons and daughters. Their children in turn send comparatively large sums of money back to their homeland and "dollarize" its economy.

Countries around the world now routinely market products by advertising their monthly dollar value. Even Castro had to decriminalize dollar transactions and recognize that his people were not part of a single economy because Cuban Americans were sending home dollars (often earned at less than minimum wage) from America. To paraphrase author Joel Millman, democratization comes with dollarization and both are sweeping the world.

On the whole, most wages would not drop below the "minimum wage" that is set by government because productive people would choose to leave that job. The market has largely vaulted past government in the arena of wages (most workers make more than the mandated minimum) and ignored it elsewhere (illegal immigrants working for less than the mandated wage). The result is that the people who are supposed to be helped by minimum wage laws (low-income, law abiding citizens) are instead hurt most by the elimination of the jobs they are talented enough to perform.