Currently, there is a large push in the realm of US politics concerning minimum wage. Some on the left are pushing for various dollar amounts to become the new minimum wage; others on the right are pushing back out of a fear that such an increase will put undo stress upon an already weak economy. As of January 1, 2021, 19 states raised their minimum wages to values anywhere between $8.65 to $14. Ironically (at least to me), the highest minimum wage at $15 an hour in this country does not in fact exist within a state, but in the District of Columbia. There are economists, politicians, business leaders, and everyday people on both sides of the argument, and while I suffer no illusions of being able to provide a quick fix to this dilemma, I would argue, we as a society have allowed minimum wage to become an easy scapegoat when in fact it isn’t the central issue at all.
First, let's discuss the economics of wages, what the respective supply and demand for labor look like, so basically, let’s talk Econ 101. The simplified story of wage economics is that there are two sides to the issue of deciding wages. There are the suppliers of labor: you, me, and anyone else who works in order to bring home the bacon. Then there are the demanders of labor: companies or corporations, basically any business organization. I’ve attached a basic supply and demand graph here, and we’re going to walk through the basics of how to interpret this in regards to wages.
So you, the individual, are represented by the blue “Supply” curve. Basically, the higher the wage, your price, the more you are willing to work. If you’re only getting paid $2 an hour, you probably wouldn’t be very willing to work very many hours as it just isn’t worth your time. However, if you were being paid $1,000 an hour, you probably would be willing to work far more as it’s much more worthwhile. (I acknowledge here to my fellow economists, this is oversimplified, and I realize there comes a point that this explanation breaks down as the supply curve begins to go down, but I will not be dipping into that here.)
For companies, they are represented by the red “Demand” line. Basically, the more expensive it is to pay a worker, the less hours they want that worker to come in and work. But the cheaper the worker, the more the company wants them to come work. If an employee is making a company $50 an hour, but only costing the company $5 an hour, the company will hire as many hours from that worker as they can. (Again, I acknowledge this isn’t totally representative at all wage levels, especially the higher ones, but for the sake of this article’s brevity, I’ll be moving on. If you want more in depth analysis of wages feel free to contact me for a longer discussion).
In a completely free and unregulated market, companies and workers would be free to negotiate and come to an agreement that both parties agree on for the worker’s wage. That is represented by the equilibrium point on this graph, or where the red and blue lines intersect. Minimum wage disrupts this. Minimum wage restricts companies from hiring individuals who would be willing to work for below this amount, which results in a term called deadweight loss. In terms of our national economy, minimum wage likely causes very little deadweight loss as less than 2% of workers across the country make minimum wage. The question of how much deadweight loss is generated by minimum wage, however, is a hotly contested point by economists of various organizations. Is the deadweight loss of minimum wage offset by the higher wages the floor provides? I don’t know. Frankly though, I don’t think it matters.
See, the minimum wage has made it so America’s youth and first-time workers have been deprived of the valuable opportunities to learn how to negotiate for a wage. The lack of these skills means people enter the workforce at a lower wage because of the lack of wage negotiation skills. This then creates a snowball effect for these workers who start at lower wages as it means it takes them years of work to catch up in earnings to those who did negotiate and received higher wages initially.
I’ve seen this first hand at the first full-time job I found after earning my bachelor’s degree. I was hired by a tech company, JTI, in the spring of 2019, straight out of school. There were four of us hired with various types of undergrad degrees and a variety of schools. We were all hired to technically fill in different positions on a team but ultimately ended up performing the same roles as a type of software engineer by building JTI software to customer specifications. I am not a programmer or coder by any stretch of the imagination; I thought I was being hired by JTI as a business analyst, but that did not turn out to be the reality whatsoever. Out of the four of us hired by JTI that spring, I was certainly the least qualified for the position we all ended up filling. I was probably the worst at our job as I had zero experience in coding previous to this job and was learning everything on the fly. Yet, somehow, I was earning the most straight off the bat.
I remember talking one day about wages with those three coworkers, and one was talking about how they were making such a significantly smaller amount than they thought they’d be with a bachelor's degree in a STEM field out of college. Having no tact whatsoever, I asked him what he made. All three turned and kind of stared at me, which led me to backpedal, where I apologized and offered to share my salary. I then went on to explain that by not talking about salaries with our coworkers, this gives companies an advantage when it comes to negotiating with employees as one party (the company) has a better picture of the situation than the other (the employees). They ended up asking about my salary. I shared the details of my salary. They all shared theirs, and we were surprised by how we made different amounts for essentially the same jobs. The one who first started the conversation was making $32,000; the next lowest was making $35,000. This was followed by the salary of my last coworker, making $39,000, which left mine as the highest at $45,000. Which is crazy, ‘cause again, I was probably the worst out of all four of us.
I attribute this discrepancy to the fact that I was the only one who had not taken the first offer the interviewer offered but, instead, engaged in a little back and forth. My coworkers all took the first offer presented to them. It surprised me to learn that not a single one of them had engaged in any sort of wage negotiation. This is a perfect example of how important it is to learn how to negotiate wages when obtaining work. This is where I believe minimum wage has hurt us the most. By giving companies that as a crutch, minimum wage makes it seem like companies know where the starting salaries should be, taking that power away from the workers.
We need to all learn how to negotiate wages. We need to learn to evaluate the worth of our time and probably, more importantly, the worth of our time to the company and charge the company accordingly.
Expecting companies to make decisions based on moral expectations is a stupid concept. It’d be nice if that happened, but companies are incentivized to make profits. Simply put, no matter how ‘family-like’ a company is, the company’s first commitment is to the owners and shareholders who are undoubtedly more concerned with profits than the rank-and-file employees. So it is up to us as the suppliers of our labor to extract as much as we feel we deserve from companies in order to be fairly compensated. We can do this by negotiating wages, sharing the information of our wages to help potential workers have as much information as the company and by unionizing in pertinent fields. (You may ask what’s a pertinent field; if your company doesn’t want you to unionize, I’d wager you probably need one.)
Going back to my earlier story, my three coworkers were probably a bit hurt when they learned they made less than me and rightfully so. I know if our roles had been reversed, I’d be hard pressed not to feel some animosity in that situation. I would, however, hope that animosity would be directed toward the company rather than our fellow coworkers. In most situations, companies discourage the sort of conversation we had about salaries because it will nearly always result in dissatisfaction. In some cases, that will result in conflict between team members. Hopefully, though, we can all realize that if a coworker is making more than us, it’s not the fault of that worker but the company, and as a result, we can use this additional information to receive a more complete compensation for the work we do for our company. (I am not saying every employee at a company should be paid the same, hardwork and ability should be rewarded, but in my situation, the wages certainly were not fair).
Ultimately, I do not believe there should be a minimum wage at all, I believe that minimum wage has been used as a crutch by workers as well as companies throughout the country. Minimum wage favors the companies and deprives Americans of valuable skills that enable us to better ourselves. Minimum wage is promoted as a social betterment policy for low-skilled workers, and in many cases, it has done that, but it has also handicapped workers and given far more control over wages to companies.
About the Author: Logan Longhurst is currently figuring out what he’s doing in life, he’s currently in a PhD program at Claremont Graduate University in southern California. He spends his time outside of class and research talking about politics, attempting to have a social life, and playing utlimate frisbee at the beach. He loves the color green and the story of the 'Dog who Tried to be a Dragon'.