The backstab of minimum wage

I live a pretty privileged life by evidence that I can simply work in a field I love working in. That’s not a life my parents were able to have especially immediately after high school. I stand on their shoulders, proverbial giants who did so much of the heavy lifting for me, and hopefully for my children when the time comes. What this privilege has afforded me was the chance to take on several internships in different capacities and at different wages.

Today, I still work for a wage under the the proposed minimum wage of $15, and when the call for raising the minimum wage is brought forth again, it is always sold as a benefit — the poorest will be helped and a sense of justice will be restored in the economy. This is my evaluation of that claim and it bears me no joy to think how silently destructive it truly is — for myself potentially, but moreso for those without the simple privileges I enjoy.

When I worked on campus, the minimum wage in the city rose from $10 to $13.50. It was clear that I benefited immensely as someone who had been hired at $10 and was good enough to be kept on through to $13.50. That is the best case scenario for anyone, and it is the most apparent: those who have and can maintain their jobs at that minimum wage are going to be paid more per hour, as per the policy. It is the most direct consequence, everyone can see that, everyone can know that.

It can be summed to a kind of ‘employment re-negotiation’ triggered by public policy. That is one possible impact. However, though we will always know when we are the beneficiary of this policy, we may never know when we are the sufferers. Said differently, we will never know the opportunities that failed to materialize, whether for us or for others.

This is where we must understand the indirect consequences.

For one, we have to know why wages exist at any price point. Why is it that my job was at the NYC minimum wage of $13.50, but my supervisor was paid $20 or $25 per hour? Why does anyone get paid anything at all? How can jobs exist above the mandated minimum?

The answer is a bit dry; it’s the price system at work. Firms and employees negotiate prices in broad sense for the sale of their skills and arrive at a price that aims to clear the market, so that those willing to sell their labor can find an appropriate price at which to do so.

This takes into account two things: the productive value of your labor establishes the upper limit to how much anyone would be willing to pay for your labor. It would not be sustainable to pay for a job at a price point that is higher than its value, and in an employment scenario, that can more easily be translated to a dollar amount of productive value.

Then, the specialization of your labor establishes how much negotiation power you individually have for pushing your wages as close to that upper limit as possible. The more specialized and productive you are, the higher your wage can be.

With this understanding, the minimum wage is really a policy pointed at the least specialized and productive labor on the market. The question then is what can be done for the people who find themselves in this position of having lower wage prospects?

Raising the minimum wage will mandate that the only jobs that can exist are ones that are above a certain price. In other words, it’s a ban on any job that pays less, and taking in what we know about how prices work, lower paying jobs are jobs that are the unspecialized and less productive jobs. We can hope that the least specialized and productive members of our society may get a raise, but that is unlikely.

To understand why, consider that wages are an instance of trade between the firm that buys labor and the worker who sells his labor. In trade, you have to give something of value to someone else; you can’t just get what you want without providing value. Therefore, the worker is trading in an hour of her time for money that she feels is more valuable than whatever else that hour could have been spent on, while the firm trades money for that hour of labor (the labor being more valuable than the money at that price). This means that ultimately, to make $15 an hour, you have to provide at least $15 of value to the market. To expand that point, think about it this way: to make ‘a living,’ you have to create ‘a living’ on-net for the rest of society through the market economy.

That is a rather high bar on some level. Who can be productive enough to create ‘a living’ worth of value for the rest of the world? 5-year olds probably can’t. 15 year olds? Maybe. 30-year old men who graduated college? More likely, but they’re not really the focus of the minimum wage: the focus is on the least productive, least specialized jobs.

And that’s where the problem is, because proponents of the minimum wage policy believe that the minimum wage is going to push employers to pay more for this lower-yield labor (they’re focusing on that ‘employment re-negotiation’ impact). However, what’s more likely is that lower-yield labor will simply be left unsold.

Australia, often praised by minimum wage proponents, acknowledges this within their own minimum wage policy: their policy is tiered by age, so that young people may be paid less than the adult minimum wage in order to give them a chance to sell their labor. This recognizes that the minimum wage does in-fact limit the possibility of buying and selling labor on the lower end, disproportionately impacting particularly young people who are unskilled and less educated by nature of their youth. But this tiered strategy only seeks to help the youth whereas the real impact of job elimination is on those who are unskilled and less educated.

So that brings up my next point: this minimum wage, correctly understood, is a ban on low-yield labor (labor that is less productive). Therefore, without exemptions to the policy, the youth and other people who are just entering an industry are more likely to be below the productivity threshold established by the minimum wage, and therefore will actually have no options on their table aside from volunteering, unpaid/lower-paid internships, under-the-table jobs, and launching their own business.

Of those conditions, it is clear that wealthier people would be more able to make any of those choices: only a rich kid may be able to defer wages in order to take on internships and volunteering, or they may be better connected to under-the-table jobs, or even being able to launch their own business. It is clear that the minimum wage is very detrimental to the people it aims to help.

An impact that I think has been understated in the discussion is that the jobs that do continue to exist and are raised by the minimum wage are now competing with everyone else at that price point.

Four years ago, I took an internship in my freshmen year for a $20 daily stipend. At the time, I could afford to defer the wages because I had made very successful investments in crypto that could buoy my student lifestyle. If that internship were to be mandated to be $15 per hour, assuming that the company could even afford that and would be willing to take that on (not always a given), I would be competing with everyone else who wants a $15 per hour job in the industry. This would include those who had graduated and those who have greater experience. The fact is there would have been no way a freshman kid like me could have competed.

That price point impact is important because who do you think is going to get a $15 per hour job? The well-adjusted kid with a car and stable family life or the kid who depends on public transportation and does not have a stable family life? Without the minimum wage, it could be feasible that latter could get an entry-level job at $8, but when those jobs are pushed up by the law, she now has to compete with everyone else who is wants $15. This includes the college-educated, career pivoters, and just better-adjusted people in general — and they’re all going to crowd out the very people we wanted to help with this law.

The impact on the employers should not be diminished: for one, which firms have the wherewithal to only take in labor that is higher-yield? Small, local, and family businesses that don’t have a lot of leverage and economies of scale are definitely going to take a hit, though all businesses that have any basing of labor in that lower-yield range is going to have to make major changes either way: primarily, do they have to cut hours? That happened to me at NYU: they pumped up the on-campus wages from $10 to $13.50 over two years. We were immediately forced to cut hours and to cut jobs — at some points in the week, they just couldn’t afford to have any student TAs on the job and had to resort to the non-student staff alone — and this is a giant school like NYU! They have since adjusted, but it required all student employment managers to have to submit proposals for more money, and then for the school to audit the need for more labor, and so forth and so forth. Ultimately, the jobs still need to be reevaluated to justify their existence at the higher price point.

But further more, and adding to the problem of lower-yield people like the disadvantaged and whatnot being out-competed, the higher wages is a dis-incentive to turnover, because you don’t want to be paying so much throughout the initial training months and whatnot only to find out that the hired persons are not as good as once believed, or that they don’t want to work there anymore, etc etc etc — so this creates a stronger reason to make an internship program that onboards employees over a longer-test period while they can pay them less. In addition, or in fields where they don’t do internships, this also means that an employer is going to be much more scrutinizing about who they hire and much less apt to opening new job openings or taking on expansion plans.