In his State of the Union address last night, President Obama raised the issue of raising the minimum wage. A minimum wage has been part of federal law in the United States since the mid-1930s. The controversies surrounding it are connected to some of our most fundamental debates about income, inequality, capitalism, and the role of government.
The most fundamental dispute regarding minimum wage laws concerns the legal regulation of private property. Advocates of unregulated or minimally regulated capitalism hold that business owners should be free to make whatever bargains they like with potential employees. Workers are not forced to work for any particular employer, therefore (the argument goes) they are free to walk away from a deal they don’t like. The problem with this argument is that while workers are indeed free to reject employment with any particular employer, they are not free to reject employment with all employers. If you don’t own a farm, factory, or business, and aren’t independently wealthy, you will eventually have to work for someone who possesses the resources to hire employees. In this situation, business owners will have significantly more bargaining power than their employees and will be able to use that bargaining power to drive down wage rates. Minimum wage laws can be used to counteract this trend and reduce economic inequality.
In the U.S. today, minimum wage laws are far from watertight. Restaurant workers who wait tables, for example, are excluded on the assumption that they earn tips in addition to their wages, even though for any given server on any given day, that might or might not be true. Other workers slip below the minimum wage because their employers simply dodge the law altogether. In 2010 the Bureau of Labor Statistics concluded that 3.5% of workers paid hourly wages were paid below the minimum wage.
Minimum wage laws also begin to lose their effectiveness as tools for fighting inequality if we set the minimum wage rate too low or fail to adjust it for changes in the cost of living. In nominal dollars, the federal minimum wage has increased steadily since 1940. Adjusted for inflation, it turns out that the federal minimum wage is worth less today than it was for two decades between 1960 and 1980.
It is also worth pointing out that the drop in the real value of the minimum wage corresponds in time with the business-led attack on workers’ wages and bargaining power that began in the late 1970s and early 1980s.
Economists are famously divided over the question of whether minimum wage laws lead to increased unemployment. While it is possible that eliminating or effectively lowering the minimum wage (by failing to adjust it for inflation) could encourage employers to open up a few more positions at poverty-level pay, at least two decades of prosperity and strong economic growth coincided with higher minimum wages than we have today.
For those who are concerned about economic inequality, it is important to remember that government is one of the key forces capable of counter-balancing the power of private business owners. But it can only do this if the voices of workers at the ballot box and in the street are stronger than the voices of lobbyists for the wealthy. Raising the minimum wage is one way that government can do something about economic inequality. Whether or not that happens will depend on the ways workers and business owners make their voices heard in the coming days.