Don't mess with wages, support workers through education.
No one wants to work a job where the hours are long and the pay is low and clearly if all workers in an economy had higher wages. People with larger wages have more disposable income that they can either save for large expenditures or spend, either of these scenarios can help grow the economy and lead to more wealth creation all around. Beyond the cold economic downsides of low wages, when people are living paycheck to paycheck or right on the edge of poverty it should create a strong moral concern for all of society.
For those on that edge, one difficult life event can send them spiraling down and losing everything. Living with the stress and anxiety that creates is not easy and while we know how bad it can be in terms of physical and mental health, history shows us that it can also push people towards supporting extreme political movements that will only tend to make things worse. This is why regardless of our political affiliations or beliefs, we simply can’t ignore the issue of depressed wages. That does not mean however that we allow our compassion and concern for the working poor to cloud our thinking cause us to make unwise decisions that will ultimately hurt both them and the wider economy.
Take for example the “fight for 15” campaign being waged across the country; the idea is that if we raise the minimum wage to 15 dollars an hour, millions will be lifted out of poverty. It is also argued that there will be a reduction in the number of people on welfare and a strong boost to the economy in terms of consumption and spending. Those things would certainly be true, but the policy only makes sense if we ignore the very real possibility that companies will simply reduce the number of employees the hire to compensate for the rise in labor costs a $15 minimum wage represents. In many industries such as restaurants, profit margins can be razor thin and it is only through very high volume that companies are able to make money.
Let’s say a local burger joint has five employees being paid an average of 8 dollars an hour, taking the minimum wage to $15 an hour would mean going from a $6,400 a month payroll expense to $12,000 a month. That could be the difference between turning a profit and taking a loss, especially for a new business that doesn’t have built in name-recognition. So now that business is forced to either close, raise its prices dramatically, or let go of some of its employees and try to make up the difference through automation or using more pre-processed ingredients. Either way, the likelihood is that having a $15 minimum wage will lead to significant job losses, especially in key industries. Interestingly, it is probably the large, established companies that will survive while the smaller newer ones will be driven out. This seems counterproductive given the skeptical or even hostile attitude many who spearheaded the minimum wage move have towards big business.
The above scenario, which seems to have actually occurred in places like Seattle that have aggressively pushed a minimum wage hike, is an example of the unintended consequences of government interference in the private economic choices made between employers and employees. Others which have been documented include the pricing out of the labor market of people with little or limited skills and or work experience, the very people the policy is supposed to help get out of crushing poverty.
Do unintended and often negative consequences mean we should do nothing? Certainly, the libertarian argument would be to simply let the market sort itself out. What if that takes decades to happen though, what if the market won’t support higher wages given the current labor force? That might mean that those desperate people turn towards populist movements and leaders that will promise to solve their problem no matter the consequences. The reality of politics and policy is that real flesh and blood people sometimes can’t wait for everything to balance itself out economically. But how can a state act without disrupting or at least minimizing its effect on the wide economy? The answer is education, training, and apprenticeships.
The main problem with low wages is not that they are low, it is that they are low relative to the age of the workers in question. There is probably no problem with a teenager making $7.50 an hour or even $5 dollars an hour since he or she probably still lives at home and is only working to get experience and save some money. The problem is the 30-year-old mother of 2 making that much, because the only way she survives is by taking on public benefits. This is where education training, and apprenticeships come in. Instead of telling businesses and employees what wages should be, the government could expand the availability of affordable or low-cost education and skills based training, especially in those industries where there is a shortage of labor and the graduates of such programs could command decent wages once hired. Public-private apprenticeship programs could incentivize companies to take on people on a temporary basis so they learn the skills needed for the job while the government subsidizes the person until their training is done in lieu of other welfare benefits.
Now, this would still have to be balanced against revenues and other spending programs, and some distortions will still occur in other areas, but they will be minimal compared to the proposed hike in minimum wage and such programs would have the benefit of developing a better more highly skilled workforce that can grow in experience and knowledge rather than simply remain in low-paying work until retirement.