Minimum Wage: A Failure at Solving Poverty

We have a poverty issue in America. In 2015 the poverty rate was 13.5%, while our GDP per capita was $56,115.17. Our poverty line was $11,490 for an individual, $44,625.17 below our GDP per capita. But as a nation somehow poverty exists and for over 1 in 10 Americans. It does not matter if you are conservative or progressive, white or black, Muslim or Christian or so on to realize that this is a problem. If we are to be an example to the world, poverty should not exist in this fashion. But lets get this straight, its a poverty issue, not a minimum wage issue. We need to find smarter ways to fix this issue than mandatory wage laws.

The reason I bring that up is simple, progressives blame a low minimum wage for this problem. But in reality the minimum wage has nothing to do with it and will never solve the problem. Minimum wage was a great idea, but will never work.

Americans have forgotten, or maybe have never realized, what minimum wage laws are. They are price floors on the cost of labor. They set laws saying that employers may not demand labor for less than a set rate. But they do not guarantee employment.

The truth is simple. You are paid the value you create for a business minus a profit for the one who employs you, which is the value they create for the business. This statement is the bedrock on why minimum wage is a failure. If I create $7.24 an hour of value, no one will employ me, expect in one circumstance, which I will talk about later. But if minimum wage laws did not exist, I could be employed at the highest, $7.24 an hour, but more likely a tad lower. In essence minimum wage laws do not guarantee basic income for work, but restrict employment opportunities for those with little knowledge or skills.

Minimum wage has another and more damaging problem. It has created a psychological effect on the market, where people believe their labor is only worth $7.25. While this is a simplified look at it, an average McDonald’s generates $82.29 of profit per hour (This is calculated by taking yearly profitdivided by number of stores and then divided by days per year and finally hours per day). Assuming an average number of 6 employees work at a time, per employee they generate $14.13 per hour of profit. If the manager is then paid $15 per hour for their value creation, that still remains $11.71 per hour for each employee. The math is simple, our scenario McDonald’s employee can demand they be paid up to $11.70 per hour and they still generate a profit for the company. But minimum wage laws have made them demand less.

While this is all averages and theory and does not take into account that some employees/locations/times are more profitable and others less, it gives us the general idea. And the fact remains, if minimum wage was raised to $15 per hour, automation and offshoring would happen. And if you choose to cite Seattle for a raise in minimum wage as successful, note that in times of economic boom, which Seattle is in, wages will rise naturally and unemployment fall because demand increases while supply remains nearly constant. So the implementation of a higher minimum wage, only removed the psychological effect, it was and still is, a price floor below market equilibrium and therefore useless.

As stated earlier, there is only one scenario rationally feasible, where someone can be paid for more than the nominal (or dollar amount) of the value they create. If the employer’s only other option is to them themselves fill the role and in turn they can create less value because of preoccupation, then the value of that last employee is greater because it avoids a larger loss. But this only works in the short run, in the long run a more effective employee is found or the business closes.

So its simple, minimum wage can not fix our poverty issue and might in reality be causing a portion of it. The solution is not a simple, but can be done. Labor unions that help employees know their worth and fight for their worth are needed. They help us deliver one of the key assumptions of economics, perfect information. They are what can solve our poverty issue, not minimum wage.

And for those who believe in a universal basic income, I ask at what costs. I agree it would work to solve poverty, but it requires funds that must be generated through taxes. And is it worth the lost freedom of choosing where and to whom your money goes to?

I will not answer that question because I have no definite answer for it. It brings about a moral crossroad, is basic income, that could be solved with the market, more valuable than free choice. A moral crossroad that takes more time to thoughtfully answer. But I know one truth:

Minimum wage is not solving our poverty issue, only hindering its fix.

Austin Sachs, is a self proclaimed green libertarian who believes in most scenarios the solution to our social woes are market restrictions, hindering true market outcomes. He can be reached at for further comment on his ideas or work.

If you enjoyed what you read, please follow Austin Sachs for more interesting and insightful articles. Every Saturday, he releases an article from minimum wage to fossil fuel subsidies.

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