Thursday, February 27, 2014

Corporations Living on Welfare

By Brendan Jordan (Minimum Wage) - President Obama in his State of the Union address several weeks ago announced that he would issue an Executive Order requiring federal contractors to pay their federally-funded employees a fair wage of at least $10.10 an hour – because "if you cook our troops’ meals or wash their dishes, you shouldn't have to live in poverty." This announcement came after a debate over raising the minimum wage serendipitously started in this country several months ago amongst political talking heads and media elites. This debate is a tired one that now seems like a quinquennial ritual in which democrats call for a minimum raise increase, some on right claim job losses will ensue, and the raise gets passed anyways.

As a libertarian and person who broadly believes in assumptions of neoclassical economics the traditional argument against raising the minimum wage or not even having one at all made sense to me. Raising the marginal cost of labor would decrease the quantity demanded by employers and more people with low skill sets would be out of work or the added cost would be passed onto consumers resulting in an effective wage cut for all.

However, empirical studies have cast doubt on this ostensible economic truism in recent years. One study by David Card and Alan Krueger commonly cited by higher-minimum wage advocates found that New Jersey's increased minimum wage had no affect on fast food restaurants when compared to lower-waged Pennsylvania restaurants across the Delaware River.  Although studies like this one certainly cast some doubt on the neoclassical position, I find place to place comparisons troubling when trying to advocate for policy positions. We are all too familiar with this phenomenon during debates over gun control. These discussions resemble verbal games of Sporkle where gun control advocates and proponents yell out low-crime places with either strict or loose gun laws to prove the superiority of their policy preferences.

However,  Ron Unz, a California conservative activist and businessman, offers a more convincing criticism of a lower minimum wage than the standard liberal arguments. Unz argues that because of a low minimum wage, low wage workers need to rely on welfare and subsidies in addition to their income. This is effectively a form of corporate welfare since the safety net covers employees' wages that would presumably have been paid for by the employer in the absence of such a net. If there was no safety net, workers would be a lot less willing to work at McDonalds for $7.25 and the resulting competition amongst employers for low skilled workers would drive up wages to their true equilibrium.

Although this is a clever and attractive argument for raising the minimum wage on libertarian or conservative grounds, it does not address the true problem, which is not a low minimum wage, but the modern progressive welfare system in this country. Companies could not get away with relying on welfare to pick up the tab to support their employees if employees had to rely on their wage as their main source of income. The savings from the elimination of the welfare programs would also result in an effective pay increase for all tax payers, allowing people to demand more of the goods and services low-skilled workers provide.
I am not heartless so a negative-income tax or charity vouchers for the disabled maybe appropriate to prevent people from 'starving in the street.' Nevertheless, for ready, willing, and able workers eliminating welfare might actually provide the best solution for their problems.

However, given that this country has shown a strong dedication to a robust welfare state, the most libertarian solution in practice could involve supporting a higher minimum wage for those workers who rely on welfare to supplement their income. 

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