Minimum Worth

Minimum Worth

Minimum Worth

Moneybox
Commentary about business and finance.
Oct. 6 1998 6:32 PM

Minimum Worth

Amidst the chaos that is Flytrap, it's easy to forget that Congress is still occasionally engaged in the process of legislation. Not surprisingly, then, the Senate's 55-44 rejection last week of a proposed $1 increase in the minimum wage passed relatively unnoticed. The increase would have boosted the wage earned by 12 million Americans from $5.15 an hour to $6.15 an hour in two 50-cent increments, beginning on Jan. 1, 1999. The vote was along party lines, with the exception of two Republicans, Arlen Specter and Alfonse D'Amato, who both voted for the increase.

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The case against the minimum wage is relatively simple. Academic economists assume that wage increases destroy jobs by keeping employers from hiring unskilled workers. As it happens, there's not much empirical evidence for this, and the most notable academic study of recent years--Card and Krueger's study of employment in New Jersey and Pennsylvania--found no evidence that job creation in New Jersey, which raised the minimum wage, was slower than in Pennsylvania, which didn't. But it's certainly possible that job growth in New Jersey would have been even faster had the minimum not been raised. And obviously there's a point at which a high wage for unskilled workers would deter job creation. It's just not clear that we're anywhere near that point. Even firm opponents of the minimum wage believe that every 20-percent increase in the minimum reduces the employment of young workers by just 2 percent. So the numbers are not huge (though that's of little consolation if you're one of the 2 percent).

In any case, what's underneath the opposition to the minimum wage is the same principle that underlay the opposition to maximum-hours legislation, namely the idea of freedom of contract. Why should the state be able to tell someone he can't work for $1 an hour if he's willing to, and if working for $1 an hour will guarantee him a job? People should be allowed to set their own standards for employment, and enter into contracts without state interference, the argument runs. (This was the basic principle enunciated by the Supreme Court in Lochner v. New York, the 1905 case that struck down state maximum-hours legislation.)

One response to this is simply to make recourse to the empirical evidence, and to argue that there's no evidence that the minimum wage destroys jobs. In an economy running at full employment, in which unskilled workers have actually been losing ground over the last decade, the minimum wage actually does boost the living standards of those at the bottom of the employment ladder. The 10 million workers who are being paid 90 cents an hour more than they were three years ago are more important than the small number of workers who may have lost--or rather, never got--jobs they might otherwise have had.

Still, there's something unsatisfying about this, in part because freedom of contract does seem important and in part because that argument for the minimum wage sounds a little too much like the argument that multinationals shouldn't employ Indonesian workers at bargain-basement wages. So I want to offer a slightly different, and tentative, argument for why the minimum wage in general is good and why an increase at a time of national prosperity makes sense.

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Needless to say, we don't come into the world with a perfectly honed sense of value. We determine what things are worth based upon culture and custom. And that determination is, I think, in some measure holistic, which is to say that my sense of what is a fair price for a Mercedes Benz is connected, however obliquely, to my sense of what is a fair price for a hamburger. The most important thing a worker has to figure out is the worth of her time. At heart, all labor involves the trading of time for something else--some product or some service--and employment entails the bartering of time--as embodied in the product/service--for a wage.

The problem is that there's no way to use reason to figure out what your time is worth. There's no universal standard that says that a person's time is equal to X. As a result, an important element in your determination of what your time is worth is everyone else's determination of what their time is worth. That's true both in a concrete sense--if a sizeable minority of workers is willing to flip burgers for $2 an hour, the people who will only flip burgers for $3 an hour are out of luck--and in the broader sense that you get your ideas of worth from the prevailing culture.

One answer to this would be just to let the free market sort it out, to let the tens of millions of negotiating sessions between employers and employees determine the prevailing wage. And in general, of course, that's the best course and is what we do for everyone above the minimum. But what having a minimum wage does is, in the simplest sense, determine the baseline from which all those other negotiating sessions begin. It therefore has a necessary cascading effect, helping to boost wages across the board. More importantly, the minimum wage is a communal expression of value. You might think of it as saying: "If you're an American, no matter what you do or how educated you are, an hour of your time is worth at least $5.15." There's no question that this infringes on the rights of those who believe their time is worth less than that. But in doing so, it ensures that workers in general will value their time more highly than they otherwise would have. And it seems likely that that's a good thing.