Minimum Wage: Tilting at Windmills (Published in the Houghton Star September 19, 2014 and winner of the 2015 AEI Journalism Award)

A growing number of Americans, academics, and politicians herald a rise in minimum wage as a solution to fight poverty. The concept seems simple, politicians agree what is a livable minimum wage and it becomes the law of the land. However, government solutions to economics typically resemble Don Quixote tilting at windmills.

While politicians may concoct a faux pas minimum or living wage, real wages are determined by a marketplace, not the government. As economist Paul Krugman once remarked, “Wages are a market price—determined by supply and demand, the same as the price of apples or coal.” In capitalist societies, corporations will pay dearly for specific skills or if labor is in short supply. Just ask Wal-Mart workers in Wilston, North Dakota who start at $17.40 an hour.

Now that government sets the minimum wage, employers must decide if the wage, benefits, taxes and training are worth the value of the task at hand. People with no experience or no diploma find it hard to enter the workforce. They are impeded from opportunity of economic mobility into future, better jobs. You won’t move up the ladder if you can’t get on the ladder.

Minimum wage not only shrinks job market perspectives, but also has a weak correlation to low wage workers and poverty, according to U.S. Census Bureau data. Economist Joseph Sabia found minimum wage increases on both the state and federal level between 2003 and 2007 “had no effect on state poverty rates.” According to Michael Strain of the American Enterprise Institute, “Less than 3% of hourly wage earners over the age of 24 earn at or below the federal minimum.” Most minimum wage earners are teenagers who are seeking work experience. These same teens face a 24% unemployment rate.  It could be argued that high school and college workers with the need for experience should forgo any minimum wage. In the past, college students voluntarily traded labor for the experience gained from internship.

I discovered how differently fast food restaurants were operated while travelling around Europe playing baseball this summer. At a McDonald’s in La Rochelle, France, there was no counter person taking orders, instead it was a computer. Why would an American corporation be more technologically advanced in France than in their domestic franchises? I asked a French worker, who said McDonald’s found it more economically feasible to buy an expensive computer system rather than pay France’s minimum wage of $12.09 plus a multitude of benefits and payroll taxes gifted by French politicians.

When labor is costly and can be replaced by machines, most businesses invest in capital intensive systems. Even in the US, we are now witnessing technology replace the demand for workers. Check out your local bank with half the amount of tellers as it had ten years ago. Home Depot has automated cashiers. At Applebee’s, your “Neighborhood Grill and Bar,” don’t expect Flo, your favorite, neighborly waitress, to take your nachos order in the future. “Presto”—the tablet computer—has secretly been added to your table, next to the salt and pepper shakers.  Since Presto works for free, should we tip Presto more than the customary 15%?

Small businesses are the engine of our economy. There should be little or no regulation on them, so long as it does not affect the safety of their employees or the public. Small businesses are typically underfunded and unable to immediately buy systems to replace people.  In fact, these businesses can thrive by giving a human-touch experience versus their larger counterparts. However, the more we increase and mandate minimum wages and fringe benefits, once negotiated privately by consenting adults, the more we increase the problems we see in France. George W. Bush once quipped, “The trouble with the French is that they don’t have a word for entrepreneur.” If we keep on passing minimum wage laws, this country might not have a word for enterprise.

Minimum Wage: Tilting At Windmills

FDR vs. The Small Businessman’s Revolution

FDR’s belief in experimentation scared business away.  FDR’s broad rules provided ambiguity of regulatory uncertainty through what Kiplinger’s “Why Businessmen Fear Washington” states as “a great state of indefiniteness and confusion ” (378) , the possibility of more laws struck down on them, and his mistake of mistaking macroeconomic problems with microeconomic problems through alphabet agencies such as the NRA all “frightened away capital, and they discouraged employers from hiring workers…businesses decided to wait Roosevelt out, hold on to their cash, and invest in future years” (Shlaes8).   The New Deal, on contrary belief, was actually accepted by many businessmen in open arms, but it disappointed many businessmen through its favoritism to big business and its favoritism to labor.  Under FDR, the US saw the rapid consolidation of power from local governments to federal governments, the power and wealth from local businesses to national corporations, and the wealth of small farmers and tenants to a farming elite.

FDR though had mixed sentiment amongst businessmen.  Favored rent seekers loved FDR while the majority of businessmen detested him such as “Hanna Coal executive George Humphrey always spelt Roosevelt with a lowercase ‘r’; dinner guests of banker J.P Morgan were forbidden to mention the ‘R’ word at all” (389). FDR provided a rent seeking atmosphere and favoritism that has never been as prominent in any other time period in the United States.  Gordon provides examples through JP Morgan and George Humphrey that big industry did not like him, but the reason was primarily that both of them were not favorited by the FDR administration and would have provided exultation if they were favorited.  Even the left leaning Gordon writes that “New Deal programs benefited some interests at the expense of others, and left the price of organization to be paid by regional or marginal competitors” (391).  These regional competitors are the small businessmen who were the true forgotten men of the 1930’s.

Most businessmen saw the New Deal as a failure because it failed consistently, provided a cartel for each industry led by the big elites in each, and higher labor costs due to the NRA.  The NRA “created innumerable problems, including increased prices, contradictory jurisdiction, and inconsistent interpretation” coupled with elitist big business favorites running each industry cartel and higher labor costs which led the NRA to be painful towards small business (391).

The small businessman’s revolt finally gained traction in 1938 during the midterm elections where the pro-small business Republicans gained 72 seats in the House and 7 seats in the Senate. In 1940, FDR would have lost the election if not for the threat of war. FDR himself said “You know, if the war should be over before the election and I am running against Willkie, he would be elected.” On August 3^rd 1940, “George Gallop, the pollster, reported that Willkie would have the edge over Roosevelt if the election were held that day” (Shlaes374). On Election Day though, FDR defeated Willkie because as Europe was slipping into war, FDR seemed like the better choice since he had more credentials through being the President for eight years and also being the Assistant Secretary of the Navy for seven years.