Low Minimum Wage = Business Welfare

In 1968, the average annual poverty income level ($3,410) for a family of four was almost exactly what a minimum wage worker could earn in a year of full time work. Today, given inflation, the average annual poverty level for a family of four is $26,200, but a worker receiving the federal minimum wage working full time for a year only makes only $15,000, 43% below the poverty line.

For the last forty years, or since the beginning of the Reagan administration, Republicans and businesses have opposed raising the minimum wage, claiming that it hurt business and the economy. In truth, raising the minimum wage does hurt certain businesses, often small businesses, but that should never have been the question. The first question should have been whether it was fair to penalize workers on the edge of poverty to keep marginal businesses going. Supposedly, the idea behind the minimum wage was to keep business from taking advantage of poor workers.

Now… when minimum wage workers can’t make enough to live on, what happens? They suffer, and so do their families…and they start applying for federal and state benefits. Those benefits are paid for by taxpayers, in effect subsidizing the various businesses benefitting from paying lower wages. The use of part-time workers, who don’t make as much and don’t get benefits provides an even greater indirect subsidy to those businesses.

Those indirect subsidies aren’t primarily paid by corporations, but by individual taxpayers, including the higher paid employees at those businesses, which is another revenue stream to support this indirect business subsidy.

The second question is what is the overall economic effect of keeping the minimum wage low. Because salaried wages are to some degree pegged to the minimum wage, especially those of workers paid by the hour, this depresses wage levels compared to prices. Combined with the loss of purchasing power by minimum wage workers, the result is that a significant proportion of workers have less and less money to spend. Add to that the fact that the lower a family’s income is, the greater the percentage that’s spent. Tht means that when lower-paid workers have more money, the economy benefits more than when those funds are hoarded in corporate coffers. Because the U.S. is essentially a consumer-driven economy, people buy less and the rate of economic growth slows.

A comparison of the minimum wage to the poverty level indicates an overall trend that, on the average, there has been more economic growth when the minimum wage is closer to the poverty level and that growth rates have generally declined as the minimum wage was frozen and costs-of-living have increased.

It’s simple. When people don’t have enough money they can’t buy things. Moreover, when the government is providing a greater share of the income of underpaid workers, because they can’t earn it, not only can’t people buy as much, but the deficit also grows, the indirect subsidy to business gets greater, and economic growth slows.

And, in a way, keeping the minimum wage below the cost of living is essentially a form of fascism, supporting business through government intervention.

16 thoughts on “Low Minimum Wage = Business Welfare”

  1. Tom says:

    Since July 24, 2009, the federal minimum wage is $7.25 per hour. As of January 2020, there were 29 states and D.C with a minimum wage higher than the federal minimum.

    52 weeks x 40 hours x $ 7.25 = $15080 per year
    52 weeks x 40 hours x $ 15.0 = $ 31200 per year

    In 2019, the Congressional Budget Office released a report which estimated that raising the federal minimum wage to $15 an hour would benefit 17 million workers, but also cause 1.3 million people to lose their jobs.

    2020 FEDERAL POVERTY GUIDELINES FOR THE 48 CONTIGUOUS STATES AND THE DISTRICT OF COLUMBIA

    Persons in family/household Poverty guideline
    1 – $12,760
    4 – $26,200

    So, I wonder if the job loss calculated by the CBO, is by some chance the number of second jobs many people need to keep themselves above the poverty level (and thus able to work regularly) in the first place?

    Maybe the US could stand a $15.00 per hour minimum wage mandate and the businesses would then be able to make a greater profit from the increased purchasing power of the consumers? The businesses could then come off Welfare!

  2. R. Hamilton says:

    The assumption that a minimum wage should minimally support someone is just wrong. There are plenty of people like teens and other parent’s basement dwellers that do not (yet) require the ability to earn their entire support. If there were to be a higher minimum wage, there should be a sub minimum wage restricted to those not depending solely on it for sustenance.

    As it is, the fast food industry is already looking to automate away as many workers as possible, and most grocery and large discount stores already have half or more of their registers as self-checkout machines. (For what it’s worth, the people who would maintain the automation, although fewer in number, would probably earn more than minimum wage.)

    (One situation is interesting: New Jersey requires gas pump attendants – no self-service there. But the price of gas isn’t necessarily higher there to pay them. Apparently their gas tax is one of the lowest…although that has consequences too, insofar as state transportation funds tend to run a deficit there. TANSTAAFL goes all the way down, it seems.)

    Even that assumes that government should be altering the market to make it gentler somehow. I strongly resist that notion too, thinking that most things within the borders should be libertarian, people should VOLUNTARILY help (or not) others, and let the chips fall where they may. Not worth arguing that businesses might need private security under those conditions; when even grocery stores (at least in non-rural locations) already have armed security, the notion that order is maintained by not letting too many starve has already become a lost cause.

    1. Tom says:

      Members of any social group can never be “equal” without a qualifying adjective. Thus there will always be pros and cons for all of the rules legislated for the benefit of society. An honest assessment of those pros and cons is necessary as pointed out by LEM’s experience and in his books.

      “… The assumption that a minimum wage should minimally support someone is just wrong. …”

      Not from the point of view of the group who do need the minimum wage, for their total support, to get out of poverty. This is the point of having laws that are aimed at the benefit of the whole of society. The additional benefit for some living at home should be weighed with the benefit of their increased purchasing power effect on the economy and their absence from social Welfare.

      1. R. Hamilton says:

        Beware any claims that compassion should exist on the scale of society as a whole, or that the needs of groups should be addressed by government; they’re always a prelude to arguing why it’s good to steal more of your liberty (and secondarily, property too, usually).

        Compassion is between individuals that know each other, at most from people that _voluntarily_ band together to assist those they don’t _yet_ know. It’s not some legislator saying here’s the minimum wage that will keep you alive, it’s not a bureaucrat at the unemployment or welfare office, etc.

        Liberty costs bodies. Some of that is fighting to defend, some of that may be fighting to rescue, but some of it is also the ignored and abandoned dying alone because trying to save everyone would cost too dang much liberty.

        I think maybe when our time comes, we should all follow the Eskimo model and go out on the ice, alone, not wasting the resources of others to keep us alive when we’re no longer able to hold it together enough to pass something on. I could do that. I don’t, I admit, know if I could let someone I knew do that, although with some difficulty, they could perhaps if only for consistency’s sake convince me that it was within their liberty to do so if they chose to.

        1. Compassion “on the scale of society as a whole” is a straw man argument that has little to do with reality.

          First…wages that place a worker below the subsistence level steal health and welfare from the worker to the benefit of the employer, but you apparently don’t consider that a form of theft.

          Second… abnormally low wages actually harm businesses and the economy as a whole.

    2. Martin Sinclair says:

      Your first paragraph conflates part-time and full-time workers which was not the stated premise of LEM’s post. You are quite correct that the first group doesn’t need as much money and, arguably, doesn’t want to work as many hours as the second group. This doesn’t mean that they should not be entitled to the same hourly pay rate.

      You seem to be avoiding the fact that, left to their own devices, many businesses will be totally ruthless about abusing the power they have over their employees. We have tried this model of society once already – it was called the C19th or, more bitingly, the Gilded Age.

      The majority of us are prepared to pay our dues to foster a society where opportunity is not largely an accident of birth, even if it means that a number of us don’t get to keep all the money we earn.

      1. Hanneke says:

        Even with a general livable wage set as minimum wage, it would be possible to set specific lower limits for working youth.
        Minimum wage levels are mandatory for adults, e.g. from age 21. Set the minimum wage for 20 year olds at 5% less, 19 year olds at 10% less, 18 year oods at 15% less, 17 year olds at 20% less, 16 year olds at 25% less than the legal minimum wage.
        Pair that with more stringent rules to protect underage workers: the lower minimum is not age discrimination, but compensation for the less flexible hours and the learning on the job they are doing. E.g. rules for the number of hours, parts of the day, and sorts of tasks that an employer can make an underage employee do: 16 year olds can’t work between 21 and 06 o’clock, or be on solitary duty after 18:00, or be responsible for running the day’s cash to the bank.

        This is how it works in my country.

  3. Bill says:

    And, in a way, keeping the minimum wage above the value of the labor performed is essentially a form of socialism, suppressing business through government intervention.

    1. It only suppresses the ability of business to take excessive advantage of low-skilled individuals. Business doesn’t have to hire them, but if it does, then it has to abide by the law.

      1. Martin Sinclair says:

        Your post raises an interesting point. Here in Australia, we see a lot of references in the media to “zombie businesses” – those that are only keeping their doors open by virtue of various forms of extraordinary government subsidy. The prediction ( expectation ? ) is that, when the subsidies end, those businesses will fold. In spite of the predictable increase to “official” unemployment and dislocation to the economy, there are a number of politicians and commentators calling for this to happen in the name of “economic rationalism”. There seems to be much less appetite for acknowledging that businesses that rely on minimum-wage employees could fairly be regarded also as zombies. Perhaps it’s that, while they don’t want to mandate a living wage, it’s not politically palatable to advocate the abolition of the government-funded subsidies for those businesses in case the electorate decides that they really don’t want people like that representing them

        1. Frank says:

          I believe that this issue is a part of (at least one) of the biggest threat to our traditional values, and, therefore, way of life. That threat is the loss of civility.

          Yes, this also presents symptomatically as lack of manners, lack of demonstrated respect for others, amongst other various examples of rude behavior.

          I don’t see this as Conservative vs. Liberal, or Republican vs. Democrat…this is the loss of civility that is rotting our society. Remember back a few decades that Reagan and Eisenhower exhibited great civility, while both were Republicans and, certainly Reagan had legitimate Conservative credentials.

          The current President acts ands speaks in the most boorish way that includes divisiveness, hate mongering, and what seems to be a complete disregard for the truth, both as an ideal and as a requirement of leading. The Republican party can still be for less government, less regulation, etc. The Democrats have allowed a contingent of very far Left to usurp a large part of their platform (if one actually exists) and their public image.

          It isn’t time to “make America great again” because America, as an idea, has been and is great. What we need is enough civility to remember that we’ve always been divided on policies…we’ve lost are ability to compromise for the benefit of all.

      2. Bill says:

        So, when these marginal business owners are unable to keep going due to mandated generosity, will there be a minimum asset price imposed by the law when they liquidate their assets? Or is it acceptable to take advantage of only certain types of people?

        1. What you’re saying is that businesses that can’t cover their costs except by exploiting people in poverty should be allowed to continue to do so. As I wrote in the beginning, below subsistence level wages are a business subsidy, and businesses and the economy for everyone did better when minimum wages were set at the subsistence level. Why is that so hard for you to understand?

          1. Bill says:

            I understand that currently we subsidize people whose work products are not sufficient to meet their requirements by providing somewhat transparent gubmint handouts. You would prefer that we change this to hidden subsidies achieved by hiking prices. It all ends up the same; people who are net positive added value are forced to prop up those whose are net negative added value. At least now the props are more visible.

          2. I find it both amusing and distressing that you find individuals who are paid below subsistence level as “net negative value,” and that you claim that subsistence levels wages are “hidden” while not recognizing that wages below subsistence level are also a hidden subsidy.

  4. Martin Sinclair says:

    a variation on a theme: https://www.abc.net.au/news/2020-09-15/backpacker-farm-workers-speak-of-wage-exploitation/12545294?nw=0

    I made a comment earlier that some people are quite happy to exploit anyone with less power than them. I sometimes wonder whether the reason that government regulation is promoted by the left side of politics is that they’re more aware of human nature. The alternative is that the “less government” advocates are also aware of it but simply don’t care – which would be depressing

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