May 18, 2015

How Many Hours of Minimum Wage Work, to Get Out of Poverty?

By In Blogs, C.Jay Engel

A friend pointed me to the following graphic over the weekend:

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Basically the point was that, compared to the UK and Canada, the United States’ minimum wage workers have to work much longer –many more hours at the US minimum wage rate– in order to “get out of poverty.”  The implication, of course, is that the minimum wage in the US is far too low and it needs to be raised.  This is one of those statistics that sound intriguing upon a first listen, but when you really consider it, it is ridiculous in its complete ignorance of actual economics.

It is true, by simple mathematical calculation, that the higher the wage that is earned, the better chance there is of making more money.  That is the essence of the graphic –a humungous “no duh.”  But this completely disregards economic theory.  It fails to consider the fact that just because a wage is set at a given level, does not mean that the employer can afford to pay it, given the marginal productivity of the employee. So in other words, if an employee’s labor brings a company an amount equal to $5 per hour, the employer would be losing money if he paid that employee at a rate greater than the $5 per hour.  Thus, if the minimum wage is set at $6, the employee will not be hired because the employer would rather not lose $1 per hour.

This can easily be seen by considering a situation in which the minimum wage is set at, say, $40,000 per hour and then claiming that -“hey! in this economy workers only have to work one hour to get out of poverty!”  Of course, the unemployment rate would be remarkably high as the number of jobs that are worth $40,000 per hour are extremely rare.  So just because a minimum wage is set at idealist heights, does not mean than people are actually earning that wage.  And the high unemployment rates in the UK and Canada reflect that.

The graphic assumes that wages –which is the price for labor– are set arbitrarily and without a reason.  But all prices reflect the supply/demand relationship of the market, and the labor market is no exception.  When labor prices are set artificially too high, the demand for those workers come down so that there is an excess of workers (unemployed workers).

Now, the more systemic problem in all these conversations in the sheer lack of considerations about why more and more money is needed to get out of poverty.  The reason for this is the rising costs of living, which stem from the Federal Reserve’s monetary expansions over the years.  The inflation of the supply of money and credit leads to rising consumer costs and, more devastatingly, a boom bust cycle that wastes scarce resources and misallocates capital across the economy.  This is the source of our economic woes and without it, the costs of living would tend to fall and poverty levels would come down drastically as well as the wealth across the economy expands over the years.  As the purchasing power of money rises, goods become cheaper and it actually becomes easier for people to get out of poverty.  In other words, it is not the minimum wage that helps people escape poverty, but rather, it is the supply of capital and investment that comes from real savings.  The free market –not the State– will solve economic problems and bring forth mass prosperity.

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com
  • Diana Morrison

    I know! I know! As many as it takes to show you’re a good worker who’s worth hiring for a better job. Or perhaps until you finish school and qualify for something better.