The U.S should abolish the Minimum Wage

R1) Inflation While I never made this argument, my opponent attempted to preempt the argument. It should be noted that most research finds that minimum wages increase inflation a moderate amount, and the inflation costs primarily fall on the backs of the poor.[1] To a degree, my opponent may be correct: assuming everything he says is true, the inflation effect will be outweighed. As we shall see, little of what he says holds up to close scrutiny. R2) Is the Market Fair? My opponent bases this argument on the arbitrary and undefined term “fairness.” Fairness is a weak criteria for analyzing any policy proposal because what one calls “fair” is dependent upon background, ideology, and education. “Fairness” is not measurable. What I will say is that the way the market sets wages is not the way my opponent says it does. He says the market is about “profit.” This makes it sound like a businessman will always pay workers as little as possible if there is no minimum, which means market wages are “unfair.” This argument is flat out wrong. Unless there is a monopoly on an industry (which is rare), it is not one singular business owner setting the wage; instead, there are multiple businesses competing for high quality labor. This leads to a competition over workers, meaning wages are set by supply and demand. In a competitive marketplace, an efficient worker who feels as though his current employer is paying him too little has two options. First, he can demand higher pay; sometimes the worker may have help from a labor union. The worker may receive higher pay because the businessman—who is thinking about profit—wants to keep the worker in order to continue running a profitable business. Second, he can quit his job and look for work elsewhere—this usually occurs if the first step fails. This system is how wages are set today. In fact, Switzerland still has zero minimum wage law—they voted against the highest minimum wage in the world when it was put on a ballot, because they are smart—and employers, on average, pay over $25 per hour.[2] In the US, California illegal immigrants—totally unregulated with no protections or minimum wages whatsoever—earn over $11 per hour. In the United Kingdom, the abolition of wage councils did not reduce wages at all.[3] Wages are determined by supply and demand, not a greedy businessman who want to pay all of his workers slave wages. If he was to do that, workers would flee his business to another offering suitable wages—and he would suffer as a result. A businessman, who is interested in profit, must pay his workers a “fair” amount in order to keep them employed. It is not out of the goodness of his heart—it is out of necessity from the marketplace. On top of all of that, this entire begs the question: Are government mandated wages “fair?” Minimum wages are entirely arbitrary. Why $7, $9, $10, or $15? These arbitrary price floors are determined more by politics than by economic realities. Market wages, on the other hand, are entirely determined by economic realities and much more effectively compensate workers in a “fair” manner. R3) Access to Basic Goods and Consumption As I noted above, abolishing the minimum wage would likely have little effect on the vast majority of workers as their wages are determined by supply and demand. As most workers already earn above the minimum—again, indicating a minimum wage is not needed to have people being paid large amounts—I question the logic that a minimum wage is needed to ensure a certain living standard. In fact, there are much better ways to ensure access to basic goods and services than minimum wages. Replacing the welfare system with a Universal Basic Income of a certain amount would make minimum wages obsolete, and expanding tax credits (like the EITC) for labor would also increase wages to a certain specified level. Neither of these policies would have the disemployment effect trade-off of the minimum wage. These policies would also be much better targeted to the poor. The vast majority of those affected by minimum wage laws are not poor, and many poor people do not even work.[4] EITC and a UBI would be much more of a boon to poor workers (and, in the case of the UBI, non-workers) than minimum wage laws. My opponent then claims minimum wages increase consumption and, therefore, lead to more jobs and economic growth. Unfortunately, this is not what minimum wages accomplish, and there are a couple reasons why. First, it assumes the increased consumption by the poor will outweigh the disemployment effects minimum wages have. Economist Joseph Sabia has calculated the effect, and finds that minimum wages reduce GDP. The negative effect on sectors that hire low wage workers outweigh the positive impacts on other industries due to more consumption. There is no evidence that minimum wages will be the big stimulus advocates hope it will be.[5] Second, minimum wages are a de facto tax increase. They reduce the returns on capital and investment as one cost—labor—increases. They serve a similar function as taxes do: to take money from the wealthy in order to give it to the poor.[6] So this means there is a tradeoff: more consumption, possibly, but many business owners will be facing higher costs and thus invest and expand less. A minimum wage may theoretically increase consumption, but the two competing factors—increased costs to business investment and the harm done to industries that rely on low wage work—act to counterbalance this effect. I strongly doubt the argument that minimum wages increase economic activity; if anything, they reduce it. R4) Efficiency Wages My opponent’s portrayal of efficiency wages is disingenuous; he forgets to mention that efficiency wages have always been about explaining persistent unemployment. As Harvard economist Greg Mankiw notes, “Persistent unemployment is a puzzle for economic theory. Normally, economists presume that an excess supply of labor would exert a downward pressure on wages. A reduction in wages would in turn reduce unemployment by raising the quantity of labor demanded. … New Keynesian economists often turn to theories of what they call efficiency wages to explain why this market-clearing mechanism may fail. These theories hold that high wages make workers more productive. The influence of wages on worker efficiency may explain the failure of firms to cut wages despite an excess supply of labor. Even though a wage reduction would lower a firm’s wage bill, it would also—if the theories are correct—cause worker productivity and the firm’s profits to decline.”[7] To summarize the theory, it attempts to explain why firms do not cut wages when they should. Due to the fact firms do not cut wages, unemployment increases. There is a trade-off that cannot be ignored. My opponent may see this as a positive trade-off. That’s perfectly fine, but not discussing the trade-off is mendacious. Efficiency wages do not really call for higher minimum wages, either, for a few more reasons. First, efficiency wages only work if a firm is paying more than everyone else. Firms, like Costco, that wish to do so are therefore at an advantage. But if everyone is paying a higher amount due to minimum wages, the efficient wage effect will dissipate. Second, what one firm does is not necessarily good for others. Costco built its entire model around paying their workers more; a small business owner, or another company, may not have the resources to do so. What is good on a microeconomic level may not be good on a macroeconomic level. Third, businesses analyze their profits all the time. They are always looking for ways to increase profits and reduce costs. If paying workers above a prevailing market wage was a good thing, companies would do it on their own. If they are not doing it now, they must’ve decided that is not good for their business. I highly doubt politicians and bureaucrats know what is good for businesses more than the business owners themselves. For the multiple reasons above, efficiency wages do not really provide a strong reason to have a minimum wage. There is a trade-off, businesses would raise wages if they thought it would help them, and mandating higher wages would reduce the effect as everyone is paying more. Minimum wages do not “increase productivity” and help businesses—if they did, business owners would already be doing it; we wouldn’t need a mandate. R4) Inequality Piketty’s key argument is that r > g—the return on capital is larger than economic growth. If this continues, all of the wealth will end up in the hands of those who control the capital (the evil capitalist pigs!) and then everyone will be worse off because of it. I doubt this claim. The biggest issue with it is that people die, people do not live forever. When they die, their wealth is dispersed and the cycle begins again. If people lived forever, sure, the top one percent would end up owning all of the wealth. But they don’t. And their inheritors are generally not good at keeping all of the wealth: after a generation or two, the rich get poorer.[8] This makes it impossible for all of the wealth to become controlled by one group of people, and blunts the harms of inequality. And Pikketty also ignores socioeconomic mobility. Between 1996 and 2005, the top 1% saw a decline in wealth by 26%.[9] How? Because many people in the top fell to lower income levels over time. Not only that, but a recent paper from the National Bureau of Economic Research finds that minimum-wage hikes reduce “average income, and income growth of low-skilled workers over short and medium-run time horizons,” and, even more disturbingly, finds that these laws lead to “declines in economic mobility.”[10] 1. http://bit.ly... 2. http://bit.ly... 3. Neumark and Wascher, Minimum Wages, 291. 4. http://bit.ly... 5. http://bit.ly... 6. http://onforb.es... 7. http://bit.ly... 8. http://bit.ly... 9. http://bit.ly... 10. http://bit.ly...