Rethinking the Minimum Wage

Minimum wage policy is a contentious issue in American politics - a classic labor vs capital debate. Advocates on the left tend to argue that it is necessary to prevent labor exploitation and ensure workers earn a livable wage. Free marketeers argue that it will distort the market and potentially lead to job loss. This is also a contentious issue in the economics field, where researchers have shown opposing evidence for the effects of minimum wage policies.

Here, I aim to argue against the minimum wage on principled rather than empirical grounds, focusing on arguments that seem to me to be overlooked in mainstream discussions. While recognizing that minimum wage policies can achieve some of their intended goals, I believe they are ultimately non-optimal for addressing issues like poverty, inequality, and labor exploitation.

I agree with those on the left that the problems listed above are real and worth trying to solve, however, I may frame them differently. For example, who is to blame for poverty? I tend to view poverty as the default human condition, rather than something that has been caused. We should want to help people, but it is not the legal responsibility of any individual or private company to lift another person out of poverty. If we as a society determine that we do not want any citizen living below a certain standard, then we should address this directly with welfare-style programs, like a universal basic income. Even better, if we want to encourage and reward people for working and contributing to our economy, then we should expand the earned income tax credit (EITC), which subsidizes low wages (1). Note that this would also decrease inequality because it would be funded by taxes paid by the wealthy.

The left would prefer to say that it is corporate greed and power that suppresses wages and therefore causes poverty and inequality. But even if that is true (and in some cases it is), why should we address this with a minimum wage? It is illegal for monopsonists (only one buyer) to use their market power to suppress employee wages, and it is also illegal for companies to collude to suppress wages. So if and when this is occurring, we should address it directly with the antitrust tools we have already established. We should increase funding for the Federal Trade Commission and the Department of Justice as well as more localized versions of these agencies to go after entities that try to interfere with our free markets. 

These are some ways to address these problems in lieu of the minimum wage, but how can a minimum wage be harmful? One issue with minimum wage polices is that they are typically implemented as a blanket policy that affects an entire country, state, or county. This implies that any company within this region that offers a wage below this level is somehow trying to cheat or exploit the worker. However, this need not be the case. 

Imagine you start a small, vegan, eco-friendly bakery. You don’t have much funding and need to compete with the chain bakery down the street. So you put a sign in your window offering jobs that only pay $5/hour, but your crew is like family and the work environment is super friendly. A girl walks by, sees the ad, and decides she would prefer to take this job than make twice as much at the chain bakery where the manager sucks and they make you wear those stupid uniforms. 

At this point, if there was a minimum wage of $10/hour in your jurisdiction, you would be breaking the law and the chain bakery would be just fine. But ask yourself, are you exploiting this girl? No - she chose to take the job voluntarily and retains the freedom to quit whenever she wants. Are you causing her to live in poverty? No - you literally just met her. In this way, a minimum wage could actually benefit larger businesses at the expense of smaller ones.

Someone may contend that if this girl had no other options, then in some sense you would be responsible because she has no choice but to take your low-wage job. But this is misleading. If she was in a state of having no options, and then you created an option, you can only have made her better off. Why should you be ridiculed for this when every other person in this town has failed to offer her something better? This gets back to my points from earlier - no one is responsible for ameliorating another’s poverty, but as a society we can address this problem collectively. 

Another way to see the misguidedness of minimum wage policy is to consider volunteer positions and unpaid internships (2). These are positions that offer no payment, but give people opportunities to contribute to their communities and gain experience. The mere existence of these positions is evidence that there are features of work that people desire besides a wage. Employers should be able to offer tradeoffs among these features that are not constrained arbitrarily. Why can an organization offer a position that pays $0 or $20/hour, but not one that pays $5? By limiting the types of contracts that employers and workers can make, the minimum wage can indeed distort the market in negative ways.

My sense is that advocacy for a minimum wage comes from a noble desire to help the worst off and a justified skepticism of big business. I share these intuitions, but believe we can more effectively address the problems of poverty, inequality, and labor exploitation with the EITC and stronger antitrust enforcement. These tools may not be completely sufficient, but they are a step in the right direction, and they avoid the potential harms to workers and small businesses caused by the minimum wage.

* Parts of this post were edited by Chat-GPT

(1) Fortunately, Kamala Harris is planning to expand the EITC.

(2) I reference unpaid internships here not necessarily to advocate for them, but to rather to show that people are willing take jobs with no pay. Despite valid concerns that these positions will only benefit wealthy students who can afford to take them, data seem to suggest that students from lower income families are more likely to take these positions (see page 5).