The Truth About Minimum Wage

Dec. 24, 2010 - PRLog -- The following paraphrases an interview.  Dr. L. Wayne Gertmenian is Professor of Economics at the Pepperdine University School of Business and Management.  In addition to a Ph.D., Dr. G received a B.A. from USC, and an M.B.A. from the University of Idaho.    

Dr. G., the Pro Express has hosted divergent editorials regarding minimum wage.  We look now to you to set the record straight.  First, why does the federal minimum wage exist ?

      The Fair Labor Standards Act of 1938 created the federal minimum wage.  The Act followed the Great Depression, wherein people became so desperate for work  that small groups would collect $10 to $15 between themselves to pay an employer for “a chance” at a job.  After the period of time allocated to their so-called chance expired, unscrupulous employers fired the group and took up the next collective’s bribe for work.  I am still repulsed by the thought.    

    Other examples of abuse in that era include promises by employers to pay folks 50¢ per hour if they worked well, otherwise 10¢ per hour.  Abusive employers almost always paid the latter wage at a time of their choosing.  

   After a large group of honorable employers including my father traveled to Washington, D.C. demanding that Congress legislate fair labor laws, the Act was enacted.  

   The Act set a minimum hourly wage — the lowest amount possible — to which an employer an employee could agree for the employee’s work.  Moreover, it required employers to pay up within a time certain.  Still, if a disagreement existed as to the wages paid, the Act created a Labor Board to adjudicate the dispute.

People commonly talk about a living wage?  Should the federal minimum wage be raised to provide for a living wage?

    A common misconception is that the Fair Labor Standards Act provided for a living wage; it did not.  The Act’s purpose was to create a floor—it told and continues to tell the country that any agreement to pay a person below $X an hour is invalid, and must be interpreted as a contract to pay the subject at least $X an hour.  

    Whether the federal government should enact laws that provide for a living or prevailing wage is a completely different topic that touches on a diversity of issues ranging from personal morality to whether you believe that the amount of the living wage depends on where you reside in this vast and economically diverse country.  
Unions in the U.S. frequently advocate for a higher minimum wage.  Are the interests of the poorest in this country advanced by such advocacy?    

    To say that unions today carry out the work of the poor would be erroneous and contravene readily available empirical facts.  Generally, laborers can be divided into three groups: (i) unskilled, whose jobs can be learned within 90 days, (ii) semi-skilled,  whose jobs take between 90 days and 3 years to learn and (iii) skilled, whose jobs take more than 3 years to master.  Most  unions members are semi-skilled workers.

  The interests of the semi-skilled frequently do not align with those of the unskilled.  Suppose at minimum wage (MW) #1, 10,000 unskilled work for a given employer.  If the MW is raised enough or too many times within a short time—to MW #4, for example— the employer, who must pay not only wages but also employment insurance taxes, workers compensation premiums, social security, etc.,  will soon realize it more profitable  and  potentially productive to replace 5 of those unskilled workers with 1 semi-skilled worker and a machine.  In the aggregate, the employer can reduce its workforce from 10,000 to 2,000 persons plus machines, maintain the same or increase levels of productivity and reduce some of its variable costs.

    If attentive, you would note that all of the aforementioned employer’s unskilled workers lost their jobs in favor of different, semi-skilled skilled workers.  

    Ironically, the unskilled population exalted each increase of the minimum wage, from MW #1 to MW#4.  The political party which enacted those increases won the unskilled workers’ affection and votes. That same party is ultimately responsible for the unskilled workers losing their jobs, albeit it much later.
How fast does this all happen?

    The phenomenon by which employers formulate and carry out their response to an increase in minimum wage takes more than 18 to 24 months (or 1.5 to 2 years) to unfold, and sometimes much longer than that.  President Bill Clinton, for example, had a superb economics education.  He signed into law multiple increases in the minimum wage, including one which ultimately jumped the minimum wage 21% within a 12-month period (H.R. 3448).

   Clinton knew that he’d be displacing the jobs of hundreds of thousands of the poorest Americans, but raised the minimum anyway.  His concern was a political one; he signed the subject legislation on August 20, 1996, and would face the electorate later that year on November 5th, when the Office of the President  would be up for grabs.  

    Because the vast majority of Americans are not economists and often have short memories, the electorate rarely connects a poor economic policy outcome with its corresponding decision-maker.

Are there other areas of the economy where political parties may take advantage of the relatively unsophisticated electorate?  

    Of course.  This conversation is about the minimum wage, but tariffs and hampering free trade is another prime example.  Pressed by an industry or an industry’s lobbyists and finding it in their self-interest, congress and the president have historically raised tariffs and kept out foreign products in an attempt to grow local industry.  

    This temporary appeasement or protectionism (mercantilism) benefits the acting political party and in the long-term severely damages American industry.  Look into the tariff’s imposed on blown glass in this country back in the 1800’s and their subsequent effects on the American blown-glass industry.  Not good.  And that is a representative sample.      
How can we remove the influence of cheap political ploys with regard to such an important aspect of our society—the economy?

    A recuse law — if you, as a congressperson, senator, assemblyperson, county supervisor or other elected, take any money from an organization, then you should be required to recuse yourself from every vote which relates to or affects that organization.  

    The Supreme Court has recently ruled that the money flowing from corporations, for example, to the U.S. Congress cannot be stopped because political participation via campaign contributions is part of a class of activity protected by the First Amendment.

    The only viable way to ensure that office holders’ cast votes based on policies’ merits rather than the gross campaign contributions received from one side of the issue or the other, therefore, is to ensure that those who take money sit out a vote when that contributor’s legislation is put forth.

    With regard to minimum wage, a recuse law would mean that unions could no longer buy legislative votes because legislators taking money from unions would have to recuse themselves from all proposed labor law legislation.  Our lawmakers would find themselves deciding early to not take big corporate contributions, lest they be seen as ineffective for not voting on a substantial number of matters before them.        

Thank you, Dr. G for your valuable time and thoughts.  

Interview and paraphrasing by,
Zein E Obagi Jr l Legal Columnist

View full issue: http://laprofessionalexpress.com/laproexpress11-18.pdf