Scott St. Clair October 20, 2016
Modern Minimum Wage Controversy and it’s Antecedents
In the earliest days of civilization, humans evolved past their bartering system, just as they had outgrown their vestigial tails. With this event in human history we developed the concept of what we now call money, a measurable unit, the value of which is determined by a mutual agreement between all consenting parties. Money works in much the same way as bartering, a physical incarnation of a man’s ability to stand behind his work and be compensated for that in goods and services. Money functioned much the same in a loosely regulated state, it’s dispersal being a result of mutually agreed social norms and cultural elements, until the dawn of the Industrial Age.
In the year 1349, King Edward III decreed the Ordinance of Laborers, which set a maximum wage for workers in England. In 1348, a plague had severely decimated the available workforce resulting in a massive increase in wages. This increase in wages prompted King Edward III to set a wage ceiling, backed by stiff fines for anyone paying laborers above the set maximum wage (What is Minimum Wage).
The original intent of the Ordinance of Laborers was to prevent serfs from making more than the wealthy landowners deemed to be fit for their services, however, in the year 1389, an amendment was passed that set a wage floor for laborers fixed to the price of food. As time progressed, it became the duty of the Justice of Peace to determine an acceptable minimum,
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livable wage for workers. Finally, in the year 1604, a statue was passed by King James I formalizing the minimum wage for workers in the industry (Faragher 30).
In the late 19th century, the first modern attempts at legislation governing minimum wage were established in Australia and New Zealand. This movement was prompted by the proliferation of sweatshops, staffed by single women and young children. It was generally accepted that the owners of sweatshops had an unfair level of bargaining power over the women and children that they employed (Faragher 35). The first modern laws, setting down a standard for a wage floor aimed to make these workers capable of self-sufficiency.
Modern minimum wage is set based on a variety of factors, mostly based on the supply and demand model of economics. The basic premise of the supply and demand model for minimum wage theory reason that if the minimum wage increases above the wage rate of established forces in the market, then the amount of unskilled workers in the marketplace will fall. The increased minimum wage would force the unskilled and lowest paid members of the workforce out of the job market, as employers can no longer justify their cost. In short, the most elementary theory states that if one is to raise the minimum wage, it will be a boon to those unskilled workers who display latent talents, worthy of their new pay, but would drive to unemployment those unskilled workers with no marketable skill sets. A company must cut back on employment in order to make up for the capital lost in raising wages, this forms the basis of the neoclassical model for minimum wage.
There is a group of economists who argue that it is not a necessary function of the economy for a wage increase to spell out a greater level of unemployment. The economists in this camp argue that the neoclassical model is not in touch with the reality of a functioning economy. By
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conducting economic simulations, these economists found that the text-book model for supply and demand is logically incoherent and not backed by valid empirical evidence (Krawcke). It is the belief of these reformers that an increased flexibility in the labor market does not have a rational defense in economic theory.
In this argument, it is believed that the standard supply and demand model for a wage floor is ambiguous, the prevailing theoretical models having incorrectly measured the market by only analyzing a single-sector. In the two-sector market which constitutes much of the first-world economies, ‘the self-employed, service workers, and farm workers are typically excluded from minimum wage coverage… [and with] one sector with minimum-wage coverage… [and with] one sector with minimum-wage coverage, and the other without it [and possible mobility between the two],’ (Neumark 16) this being a better model for economic analysis. Through the implementation of this two-sector model, we see the emergence of the ambiguity of the established wage model and the predictions based of the simply supply and demand model prove to be inconsistent with empirically sourced real-life evidence. It is because a non-covered (or two-sector) market is almost ubiquitous among the world’s economies, that in this alternative wage model, the curve corresponding to expenditures yields the equilibrium of the intersections of expenditures and revenues to be a much lower wage rate that the case would be expected to be under prevailing wage theory (Neumark 20).
This model showcases a free market failure in which unskilled workers are compensated less than their wage margin with regards to monopsonistic assumption. It is because of this evaluation that the economists in support of this model suggest a minimum wage in congruence with the necessary level of compensation being equivalent to the marginal products of their
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labour. The heart of this model is that minimum wages act as a market control tool, similar to anti-trust regulation, versus a simple model for facilitating the livelihood of unskilled workers.
The main argument between economists of opposing viewpoints is the various elasticities of supply and demand in labour markets as determined by the empirical testing. Economists have facilitated the testing of many different aspects of minimum wage including: effects on unemployment, effects on wage distribution, and effects on wage distribution amongst familial units. The inconsistent results of these empirical studies lend credence to the idea that the model on which this testing is inherently flawed in it’s logic and in need of revision in order for results to be taken as an effective means of market regulation.
The most recent survey conducted of economists found that their feelings on minimum wage laws were mixed. In the study, 46.8% of those polled favored abolishing the minimum wage, 37.7% wanted an increase in the current wage floor, 14.3% supported the current minimum wage, and 1.3% were in favor of lowering the minimum wage (Faragher 27). The arguments of these various economists were mixed but most fell into certain categories.
Those in favor of holding a minimum wage felt that minimum wage increases the standard of living for the poorest people in society, and stimulates consumption within these groups. Having a minimum wage forces industries to have a focus on efficiency and industry automation, all the while promoting technological development. They also held the belief that having a wage floor increases the work ethic of the unskilled workers who are now being asked to perform more at the demand of their employer, who is now paying more for their services.
They believe that a minimum wage decreases the dependence on government-funded welfare programs because it increases the income of the lowest paid members of society. In
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addition, they also believe that a minimum wage will encourage people to go into the workforce rather than pursuing other alternatives for money, such as money laundering, drug sales, et cetera. The most fundamental argument to this camp is that a wage floor increases job growth and creation, thus promoting a better economy (Neumark 38).
On the other side of the debate, those against an established minimum wage believe that a minimum wage hurts small businesses rather than large corporations, and because of that promotes the possibility of industry monopolization through the suppression of competition. They also argue that a minimum wage results in product inflation as businesses are forced to raise prices in order to compensate for the loss of necessary capital. It is also believed that, as far as social welfare is concerned, a wage floor is less successful at assisting the poverty level than other alternative programs, such as Income Tax Credits, or subsidized education (Neumark 41).
Not every economy has a wage floor in place to regulate their economy, alternatives to minimum wage have successfully been implemented. One of the most popular methods of wage control is called a basic income, which is a type of social security in which recipients are periodically provided with a lump sum which is sufficient for a basic livelihood. This approach gives recipients more bargaining power over employers and allows job hunters to spend more time searching for a career without the threat of debt and destitution. Supporters of a basic income argue that because a basic income is based on a rather broad tax base, it would be less of a strain on the economy than a narrow tax base confined to employers (What Is Minimum Wage).
Another prevalent system, instituted in many countries is the refundable tax credit. The refundable tax credit is a system through which a worker can reduce the tax owed to their
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government through a series of tax breaks, after which the worker may receive more out of the system than which they had initially put in. This is viewed as an effective means of combating poverty, a the benefits can only be given to those who had made a wage throughout the years. This type of policy is more targeted because it prevents low-income workers who are supported by high income households (i.e. teenagers with part-time jobs) from receiving the benefits of the system (Faragher 29).
The collective bargaining system is the most effective form of wage control. It has been implemented by countries such as Sweden, Italy, Norway, Denmark, and Finland. In this system there is no legislature requiring a minimum wage, rather citizens are expected to form rudimentary unions and bargain for what they believe to be an effective minimum wage. In these countries, there is a very high participation rate in the system, as a low participation rate would lead to citizens accepting rates below the industry minimum and increase labour market competition with an equivalent increase in wage elasticity (What Is Minimum Wage). This system is effective because it gives citizens to power to negotiate a wage which they themselves deem to be a fair valuation of their work. Unemployment in these countries is at a very low rate, and job satisfaction is a record highs (Faragher 31).
It is my opinion that because of the incongruence between empirical studies in the minimum wage model of supply and demand economics, in addition to the successful implementation of alternative systems of wage setting in economies akin to our own, that the United States should implement a collective bargaining system of wage control. The wide industrial groupings prevalent in America lend themselves to the idea of loose unions setting acceptable minimum wages within the established bounds of economic reasoning and evidence.
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America has the necessary social involvement amongst work-citizens and a varied industry base for a successful implementation of this model into our wage model. The current wage floor methodology is outdated and ineffective at increasing employment rate and equalizing wage dispersion. The minimum wage has outlived it’s utility, just as the bartering system did millennia ago.
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Works Cited
FARAGHER, JO. "The Real Cost Of The Living Wage." People Management (2015): 26-32. Readers' Guide Full Text Select (H.W. Wilson). Web. 10 Oct. 2016.
KRAWCKE, NICOLE. "Debating The Impact Of A Minimum Wage Increase." Air Conditioning Heating & Refrigeration News 258.8 (2016): 1. Associates Programs. Source. Web. 10 Oct. 2016.
NEUMARK, DAVID. "Reducing Poverty Via Minimum Wages, Alternatives." FRBSF Economic Letter 2015.38 (2015): 13-56. Associates Programs Source. Web. 14 Oct. 2016.
‘WHAT IS MINIMUM WAGE: ITS HISTORY AND EFFECTS ON THE ECONOMY.’ Be Businesses, J10 Initiative, 13 May 2014. Web.
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