Contrary to libertarian opinion, raising the minimum wage will not deprive low-skilled workers from working

minimum wage workersMinimum wage policy and minimum wage work is once again facing increased scrutiny. President Obama proposed that the minimum wage be increased to $10.10 an hour. Several states have also begun the process of increasing wages through legislation or voter initiatives. Many consider it common sense. Increase the wage to lift people out of poverty and prevent taxpayer subsidy of minimum wage workers working full-time that are unable to make ends meet. Still some economists, business owners, and Republican lawmakers think it would spell disaster by causing higher unemployment and reduced profits for companies.

One unique argument proposed by Donald Boudreaux, a libertarian professor of economics, is making its way around conservative circles. The argument goes something like this: “If government enacts legislation setting the minimum price people can pay for a new car at $50,000,” would you (the minimum-wage supporter) believe that the end result would be people willing to pay $50,000 for the likes of a Toyota Corolla or Ford Fiesta. Or would the buyer instead opt for a BMW or other luxury model? His follow-up to this asks you to evaluate if your answer would change if this legislation only applied to high-income people.

Nifty argument, isn’t it? It has everything it needs to set up those pesky liberals and knock ‘em down in two paragraphs. His final paragraph states that until “a minimum-wage supporter who can plausibly explain why a legislated minimum price for cars will not reduce the income earned by sellers of low-end cars, you should be more skeptical of the analytical abilities of those who insist that a legislated minimum wage will not reduce the income earned by sellers of low-skilled labor.”

Let’s start by breaking down the players in his argument. Obviously, the Corollas and Fiestas in this argument are minimum wage workers while the BMWs and luxury cars are high-wage earners. The buyers in this argument are the employers. His theory appears to be that buyers of low-skilled labor will instead purchase high-skilled labor and will reduce the market for the low-skilled workers in the process.

Donald Boudreaux, minimum wage workers
Donald Boudreaux

If we use that as a starting point, just how many high-skilled workers want to work as a cashier or a fry cook? Of course everyone is going to drive a BMW instead of a Corolla if the cars cost the same. But saying that someone with a college degree willingly go to Walmart for a job at $10.10 an hour and take a job from a low-skilled worker is absurd.

The proposed minimum wage would only bring the wage to what it should be if it had kept pace with inflation. That is it, nothing more. A full-time worker would earn about $21,000 a year. One adult raising one child needs about $40,500 just to meet basic living expenses. As you can see, we are not talking about living with luxury but living with dignity.

At its core, the argument for a higher wage boils down to a dignity issue. No full-time worker should need to apply for government assistance to survive. At Walmart, for example, workers routinely need food stamp assistance just to feed their family. But to be fair, let’s look at the flip side of this argument to the “buyers of the labor.”

Walmart, the largest employer outside of the federal government made $112.8 billion in gross profits, after bond payments, last year. According to its employment records 475,000 workers made more than $25,000 a year, leaving the majority of its 1.4 million workers making less. Meanwhile, its CEO made $23.2 million or 1,034 times that of the average worker.

Let’s take it to the next step and say that a full-time worker makes $15,080 a year now. If we increase that salary to the proposed wage of $10.10 an hour, that same worker would now make $21,008 per year. Now, take that increase of $5,928 per year and multiply it times 1 million workers. It would reduce Walmart’s gross profit to just over $106.8 billion, assuming all other factors stay the same.  While $6 billion is a lot, $106 billion is profit would make most company heads grin from ear-to-ear.

I would like to pose a follow-up question to Mr. Boudreaux, “If all of the Fiestas and Corollas refused to work at minimum wage, would its BMW CEO stock the shelves, order the merchandise, direct the customers to the right aisle, ring up the customer’s purchase and clean the store bathrooms?” If not, then my follow-up question would be “Which car is more valuable to the profit margin in this equation?”

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