What's a Minimum Wage?

In the last offering in these pages your humble servant promised to take a look at two regulatory efforts that have been implemented to ameliorate the ill effects that unregulated capitalism has on the compensation of labor, and one new suggestion that would effectively have the effect of abolishing the distinction between capital and labor. In this post, I will address the minimum wage.

This is a highly disputed area, with studies predicting different results from raising the minimum wage from the current federal level of $7.25 an hour, higher in many states and localities. The problem is that there are different minimum wages in different areas; and it is impossible to study the same area, with different minimums, for the same jobs. The reason why such studies are conducted is to predict what effect minimum wage levels will have on unemployment.

But there are doubtlessly a number of factors that go into an employer’s decision to hire people, the cost of labor being only one. Another is the number of employees it needs to operate its business efficiently. Yet another is the calculation of how much the employer can charge for the product or service it is selling, which is more directly determined by the market than the employer’s costs, a factor that is of no interest to customers.

As to the wages themselves. there is the question of how much people will be willing to accept for any given job; even without a social safety net, wages of a dollar for twelve hours of work would be a waste of time for any prospective employee in the United States. Further, an employer must consider the level of skill a prospective employee will need to bring to his job.

Still, we can take it as a conceptual verity that for the same job, in the same location, an employer’s desire to hire someone will diminish to the extent it has to compensate that person, disregarding other factors. At the same time, the more money people must spend, the better that will be for business generally. So, it isn’t as simple as saying that mandated higher wages will mean greater unemployment; there are other factors in the economy to consider.

Now even if it is agreed that there ought to be some sort of minimum wage, the next question is: how much should it be? I’m going to take it as a given that wages should be, at the very least, sufficient to support an employee and her family. After all, what is a job for?

There will be those who argue that some jobs are for young people who live at home, and that it would be senseless to require that those jobs pay enough to support a family. Those who speak like this usually have jobs like working in fast food establishments in mind. Of course, there are many people trying to support families working in fast food establishments. But we can’t allow such businesses to pay young people less, because that would provide an incentive to hire only young people, to the detriment of the unemployment rate of the adult population. For the same reason, we can’t permit businesses to declare themselves youth employers.

But what is an amount sufficient to support a family? What size family?

One possibility is to consider the fact that families must live someplace, and at the lower end of the wage scale (we’re talking about a minimum wage here) that will be in rented property. And since we’re talking about families, they should, in the United States, have at least one bedroom for the parents, and another for the children. So, we should consider what wage would be necessary to rent an average two-bedroom apartment in the U.S.

It is said that, generally, one’s mortgage payment shouldn’t be more than 28% of his gross income. [1] The median rent for a two-bedroom apartment in the United States in 2020 was, according to one source [2], nearly $1,370.00 per month, or $16,440.00 per year. $16,440.00 is 28% of $58,714.29. Now if we consider one who works 50 weeks per year (because, really, two weeks vacation per year isn’t really extravagant), with 40-hour work weeks, that amounts to $29.36 per hour. That’s a little more than $7.25.

Of course, median rent will vary in different parts of the country. $29.36 per hour will be more than enough in some parts of the country, and insufficient in other parts. And that is the problem with a minimum wage that is uniform for every state and every locality. We can use other criteria than how much it costs to rent apartments, but the same problem will emerge. A nationwide minimum wage turns out to be a blunt instrument for addressing the scandal of people working yet living in poverty.

But it is a problem that must be addressed, because, after all, people work to support themselves and their families; and if they can’t do that because of low wages, the whole purpose of work is defeated. I will make a couple of suggestions in the next offerings.