Do we need a minimum wage at all? Is there a better way?

The United States has a federally mandated minimum hourly wage below which on employer may pay their employees. There is an ongoing effort by progressive politicians to raise the federal minimum wage from the current $7.25 to $15.00. Expectedly, conservative politicians oppose raising the minimum wage and libertarians believe there shouldn’t be one at all.

Will raising the minimum wage make things better? Let’s explore some evidence and some alternatives to the minimum wage.

First, let’s see who earns the minimum wage:

What this tells us is that only a little above 1.3% of the workforce earns minimum wage, as it stands today. Nearly half of these workers are below the age of 24, majority of whom have only completed high school. More than 75% of these workers are racially categorized as White.

Minimum wage map of the United States (Source: Resourceful Compliance)

In states like California or Washington, the state mandated minimum wage is above $13.00. Most southern and midwestern states have their minimum wage pegged to the federally mandated minimum of $7.25, which is about $15,000 a year. The national average poverty line for a single person in the US stands at $12,880 and it is $26,500 for a household of four. If someone earns minimum wage in a city like Atlanta, where cost of living is much higher than the rest of Georgia, then they are much more likely to live in effective poverty even if they are officially earning minimum wage. This is one reason why a variable minimum wage depending on the local cost of living is reasonable. However, a flat minimum wage is easier to communicate and convenient to fight for politically.

THE FIGHT FOR FIFTEEN

While just a little over 1% of the workforce earns $7.25 or less, a whopping 28% earns less than $15 an hour, which is less than $30,000 a year. The progressive argument is that if the minimum wage were to be increased to $15 by 2025, it will not only benefit the lowest earners, but also improve the economy by increasing purchasing power of these workers. The progressives make the case that many minimum wage earners, especially in the southern states, have to rely on food stamps to make ends meet. Therefore the progressive argument for $15 minimum wage is a moral one from that perspective.

The conservative point of view is that the market should decide the minimum wage and the government should not interfere. Libertarians would rather have a minimum wage of zero. The view on the right is that increasing the minimum wage would make it more difficult for businesses, especially small ones, to pay employees without passing on the costs to customers, and it would therefore kill jobs.

The Seattle Initiative:

In 2014 Seattle as a city decided to adopt $15 wage as a minimum to go into effect in 2017. This was a first in the country so it was studied closely by many groups on the left and right to see what its impacts would be. The results were mixed. The restaurant industry that protested the loudest, added nearly 24,000 jobs between 2015 and 2019. At the lower end, employers adjusted work hours to the point where they did not have to increase their employees’ wages. Overall, payroll fell by 3% at the lower end. Most employees who were already above the $15 threshold saw increased wages as employers had to compete to retain labor. However, the threats by larger employers to leave the area ended up ringing hollow. No one left and the city population has increased by 13% since 2015.

Seattle is a fast growing city with a hot economy and growing wages. These circumstances could absorb a higher minimum wage but would the same work in, say, Jackson, Mississippi? It is worth pondering.

DO UNIONS MAKE MINIMUM WAGE REDUNDANT?

In Bessemer, Alabama, there is an attempt going on to unionize the labor working in a distribution facility of America’s leading ecommerce company. The workers are asking for better working conditions and wages. The employer contends that they already pay above minimum wage with additional benefits, and they want to thwart the unionization attempts. I wonder why they would care if they were already paying well and treating employees with dignity.

In Europe unions are quite common and they negotiate their wages and working conditions directly with the employer. The government usually does not specify a minimum wage but provides guidelines that ask employers to pay enough so that the employees don’t have to rely on welfare benefits. Since unions represent all employees and negotiate directly with the employer, the market sets wages. All Nordic countries and Switzerland have no specific wage minimums and these countries are often called socialist by the American politicians on the right. The EU is also quite vague about setting a minimum wage.

It appears that unionization makes the debate on minimum wage superfluous. Since the employee and the employer are in direct negotiation, they set the wages and there is no conflict. Minimum wage doesn’t even come up. Cost of living, regional differences, and industry specific peculiarities decide the wages. However, this dynamic must also be seen in the light of political affiliations of unions.

Right to work states:

There are 28 states that have right to work laws, which means that anyone who doesn’t want to join a union, doesn’t have to. There is a strong correlation between right-to-work and low minimum wages.

WHAT’S LEFT OF THE RIGHT?

The largest big box retailer in the U.S. has spent roughly $6 Billion in stock buyback, an amount almost equal to what the government pays this company’s employees in food stamps because they don’t earn enough to even put food on their tables. Therefore tax-payers fund the food bill of employees who are not being paid enough to make ends meet. The Right has defended this as an element of supply-demand of labor saying that the employee is free to negotiate and is also free not to work for the company. However, in many towns, this big box retailer is the only major employer and there isn’t a better choice or any other choice at all. This is where the free-market fails.

As Scott Galoway puts it — we need to be kind to people and merciless with corporations who only care about shareholders. What if the Left withdrew its demand for a minimum wage and the Right supported unions, or even required them so that all employees could negotiate their own wages.

Wouldn’t this be a more conservative solution with a progressive outcome?

Then, businesses would select locations where they could negotiate acceptable salaries rather than go where tax-payer funded incentives have to sweeten the pot while the employees have no say in the terms of their own employment.

The United States has more flexible labor laws than the European countries do. The EU has a higher unemployment rate in general because employers hire very cautiously as it is difficult to reduce workforce during hard times. With no need for a minimum wage, a system in place for wages to be set between an employer and the employee, and flexible labor laws, the United States could find a market oriented solution that ensures livable wages for workers and some predictability for employers. Also, it would change the way site selection is done by companies as wages will vary by industry and by company, and the tax-payers will not have to fund location decisions.

IS UBI A BETTER OPTION THAN MINIMUM WAGE?

The concept of Universal Basic Income is not new. It is a government program where wealth is transferred to the masses through a payment that sets a floor for individual income, regardless of gender, class, or race. Dr. Martin Luther King advocated for it as it would have circumvented the racial and gender bias in wages. More recently, Andrew Yang has become the face of UBI after running as a presidential candidate on that platform. UBI is popular in Silicon Valley as a panacea for the automated future that would require fewer people to have the jobs that exist today.

The advantages of UBI are many — it is universal in nature so there is no negotiation needed and it is more equitable. Minimum wage is applicable to those who have full-time jobs. Those who work part-time or are searching for work fall through the cracks. UBI also makes people less vulnerable to exploitation because employees could always reduce their hours while on UBI and train for something better, which on minimum wage jobs it is almost impossible. UBI facilitates upward mobility by reducing vulnerability of lower income earners. But most importantly, UBI recognizes non-income producing work, like raising children as a stay-at-home parent, or being a caregiver to ailing parents, as productive and necessary work.

If a UBI is put in place then it would not just take away the need for a mandated minimum wage but also weaken the power of unions that have become politically active with campaign contributions and endorsement of political candidates. We need unions that are just strong enough to negotiate wages and working conditions but not so powerful that they entrench bad employees and negatively affect efficiency and effectiveness of organizations in which they operate.

The Stockton Experiment

Two years ago in 2018, the industrial city of Stockton, California, started a UBI experiment paid with donations. The city paid $500 per month to 125 randomly selected individuals who earned less than the city median wage of $46,000. There were no strings attached and no other qualifications required.

The main argument against UBI, cash transfers, or welfare in the United States has been that they would make people lazy, that the recipients would stop working, and that they would become dependent on handouts. Another fear among opponents of UBI is that “free money” would go toward alcohol and drugs. However, the Stockton experiment has proven this false and this could bring about a change of attitude towards cash transfers like UBI.

Researchers who looked at the data from the experiment found that those in the UBI group had lower volatility (48%) of income during the pandemic than the control group (68%) who did not get any UBI. Less than 1% of the UBI went towards purchase of alcohol or cigarettes. Most of the money was spent on everyday commodities like groceries, gas, and utilities. The study also found that a basic income did not dissuade people from working. If anything, it provided them stability in challenging situations and allowed them to find new employment without becoming homeless or going hungry. It brought more predictability to people’s lives. In fact, the share of people with full-time jobs rose by 12 percent compared to only four percent for the control group.

Finally, cash recipients were healthier, happier, and less anxious. “Cash is a better way to cure some forms of depression and anxiety than Prozac,” says Michael Tubbs, a former mayor of Stockton, who spearheaded the project. (source: The Atlantic)

THE VERDICT

Wages should be revised to align with inflation and with that in mind, the current federal minimum wage of $7.25 from 2009 is woefully inadequate. It does need to be revised. However, a flat $15 an hour disregards the differences between cost of living of different cities and between urban and rural areas. Just because it is easier to put in a political slogan, $15 is where the political fight is right now.

Unions have made working conditions better for workers over the years. Unions allow direct negotiation of wages between an employer and an employee body and are therefore a source of efficiency. This makes regulation of minimum wages redundant. However, the political clout that some unions wield because of their campaign contributions, has corrupted the very cause for which they exist.

UBI seems to show considerable promise in alleviating the desperation of minimum wage existence and distributes wealth more effectively. The moral hazard argument that it would lead to laziness and dependence has been largely proven false. It might be time to develop this idea further and explore its wider implications and applications.

In conclusion it seems that UBI > Unionization > Minimum Wage. However, we may need a combination of all three to have a more equitable society where wealth is not as concentrated as it is today. We need to find that formula and for that we have to start talking with each other again on bread-and-butter issues without resorting to culture wars and tribal affiliations.

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