Raising the Minimum Wage Is the “Free Market” Thing to Do

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Demonstrators protesting for $15/hour wages and proper treatment for fast-food workers march in downtown Seattle. (AP Photo/Elaine Thompson, File)

Demonstrators protesting what they say are low wages and improper treatment for fast-food workers march in downtown Seattle. (AP Photo/Elaine Thompson, File)

America’s unrivaled inequality will be center stage in our political discourse this year, as lawmakers debate raising the minimum wage, extending unemployment benefits for the long-term jobless and the Affordable Care Act’s Medicaid expansion leading up to November’s elections.

But in one sense, these debates are more about partisan politics and the interests of the major parties’ constituencies than ideology.

There is, at least in theory, broad agreement across the political spectrum that it is both proper and necessary for the government to intervene in the economy to correct market failures –- assuring that the private sector functions as it is supposed to is the “free market” thing to do. And one would be hard pressed to identify a more destructive market failure than that which keeps one in three Americans –- including tens of millions of full-time workers –- living at or below the poverty line.

According to economic theory, a free market transaction is one between two parties who both have perfect information about the state of the market – what others are paying for the same goods. Operating on a level playing field, free from explicit or implicit coercion, they each pursue their own interests, and in the end agree to a price that’s no higher than what the market will bear.

That comes pretty close to describing salary negotiations between employers and highly skilled professionals, or unions representing large numbers of lower-wage workers. It bears little resemblance to a “negotiation” between an individual who needs a low-wage job to survive and a huge company with teams of human resources experts and labor consultants.

[O]ver ten million workers struggle beneath the poverty line, unable to afford the minimal costs of survival – for nutrition, housing and health care…
As any introductory economics textbook will tell you, when a seller agrees to a price for his or her goods that’s below what it costs to produce them, that’s not a proper free market transaction. And yet, according to Census Bureau data, over ten million workers struggle beneath the poverty line, unable to afford the minimal costs of survival – for nutrition, housing and health care – and these people are selling their labor for less than it costs them to produce it.

As a result, taxpayers indirectly subsidize the profits of low-wage employers. Studies have found that workers at a single Wal-Mart receive as much as $900,000 in Medicaid, food stamps and other assistance, and that low-wage workers in the fast-food industry alone claim $7 billion per year in public benefits. It’s remarkable that anyone who claims fealty to the free market would argue that this doesn’t represent a market failure.

There are two obvious ways that the government could move to repair the failure in our market for low-wage labor. The first would be to remove the barriers to unionization that have gradually been put in place since the middle of the last century. According to recent surveys, 44 percent of non-union workers and 90 percent of union workers want to be represented by a union, but only around 11 percent of American workers — and just seven percent of the private sector workforce — is organized today.

Or we can raise the minimum wage so that people who work full-time are guaranteed a livable wage without having to rely on the social safety net. Doing so would benefit not only those toiling at minimum wage jobs – as Benjamin Harris and Melissa Kearney of the Brooking Foundation point out, a minimum wage hike would have a “ripple effect” on the entire lower-end of the labor market, increasing the incomes of about one third of the American workforce.

(It would also increase consumer demand — people with lower incomes tend to spend any extra cash they get rather than banking it — creating a salutary circle of job creation and deficit reduction.)

Opponents of minimum wage hikes argue that they’re “job killers.” Aside from the fact that the evidence doesn’t support this claim – economist John Schmitt reviewed decades of empirical research on this question last year and concluded that raising the minimum has “no discernible effect on employment” –- it’s also inconsistent with free market theory. According to Econ 101 texts, if a firm can’t turn a profit paying market prices for what it requires to produce its products – whether that’s cement for construction or labor for flipping burgers –- it should go out of business and be replaced by another firm with greater efficiency. This lies at the heart of what’s known as “creative destruction” — the process of building new enterprises on the ruins of older, less efficient ones — which is supposed to benefit the entire economy at the end of the day.

As a share of the overall economy, corporate profits are at an all-time high while wages — which have declined by seven percent over the past seven years after adjusting for inflation –- are at an all-time low. This is a sign of a broken labor market, and raising the minimum wage would go a long way toward fixing it.

Joshua Holland is a senior digital producer for BillMoyers.com. He’s the author of The Fifteen Biggest Lies About the Economy (and Everything Else the Right Doesn’t Want You to Know about Taxes, Jobs and Corporate America) (Wiley: 2010), and host of Politics and Reality Radio. Follow him on Twitter or drop him an email at hollandj [at] moyersmedia [dot] com.
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  • JonThomas

    Excellently written, and very well explained Joshua.

    While I am not a ‘free-market’ market ideologue, there is logic in it’s basic theories. All too often, the people who champion, and speak for free-market approaches to minimum wages are those whose interests and profits (too often – simply investor profits only) are in conflict with such free-market principles. In other words, they follow the mantra… “the market should be ‘free’ unless my bottom dollar is affected.”

    The second point I would make surrounding free-market theory is that it is actually anti-Constitutional.

    The framers of the U.S. Constitution gave Government the right, and ability, to collect “Duties, Imposts and Excises.” They also gave it the right to “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”

    Also, ‘in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence,… and… promote the general Welfare,’ the U.S. Government has the mandate to pass laws that protect it’s citizens from encroachment from any quarter, foreign or domestic. When The People are threatened by the ravages of an economy that is supposed to serve their own interests, or under attack from forces acting from within said economy which stomp upon the Blessings Of Liberty, then the Government MUST ACT to preserve the General Welfare of it’s citizens!

    Every person should remind one another of their self-worth, and bolster every other person’s value. Any human who wants someone to work for less than what it takes to provide themselves a living, is committing, at best, a moral indignity against their fellow humans.

  • Baron95

    If there is no downside to raising the minimum wage, why don’t we raise to $50/hr or $100/hr? Wouldn’t that be wonderful. All those full time wall mart employees making $200,000 year? And we can do all that by just passing a law.

    How wonderful. Lets do it.

  • Justin King

    The Fed uses QE to try and raise inflation, and there would be no better complement to achieve that goal than RAISING the minimum wage.

    Of course, the reactionary conservatives don’t even understand this concept.
    All they know is that they are told to fight for big biz, which wants to SUPPRESS the minimum wage.
    And the idiocy from the manipulated rural xenophobes goes on & on.

  • Justin King

    Holland’s title “free market”, won’t allow any Conservative from even reading his article.
    Sounds like a pathetic oxymoron to their knee-jerk ideology.
    Will simply wind up as preaching to the choir.
    Something he should consider with future articles.

  • Anonymous

    If $300/ week in unemployments benefits is such a great idea, why not give folks who lose a job a billion dollars?!?

    Thank you for bringing up the silliest red herring in this discussion. Obviously, $50/hr would wreak havoc on the economy, which is why nobody would propose such a thing. Corporate profits are at a historic high and wages are at a historic low — raising the minimum would simply restore some semblance of balance and equity. Economists debate the optimal figure, but most agree that it’s currently way too low.

  • Anonymous

    Well said, JonThomas. Couldn’t agree more. A peaceful but forceful re volution in the streets against today’s un constitutional model is next.

  • Anonymous

    Unfortunately, the folks opposed won’t respond to research, facts, and reason. They simply “feel” that $15 is too high because they only earned $3.10 on their first job in 1980.

  • Jeffro

    The argument for raising the minimum wage seems odd to me. I’m not against it, but according to the Bureau of Labor Statistics, only 4% of workers earn minimum wage. Why all the arguing about it? It won’t hurt anyone to pay 4% of the people a little more, and it won’t solve any problems either. All this “lifting people out of poverty” is BS. 96% of people won’t see an increase. Could this all be about votes?

  • Jeffro

    You could head down to the local unicorn burger shop in the bio-desiel bus, where workers are flipping burgers with utensils made from recycled materials all making $15/hour with free health insurance and a rainbow for each customer.

  • Jeffro

    I think the argument is about what “general welfare” is. The founders also warned about people figuring out that if they all elected people who gave them free crap all the time, the country would be destroyed. That’s why they didn’t have direct election of senators, and an electoral college.

  • JonThomas

    Interesting. However, honest people find little satisfaction with innuendo and hearsay. Would you please give me an actual example of the ‘founders’ warning about people wanting free stuff, and that such largess would destroy the country?

    I would enjoy considering your point, but in the interest of earnest discussion, you of course, won’t mind me reading such background info for myself.

    Surely if this is… “why they didn’t have direct election of senators, and an electoral college…” then you will be able to provide links and periodicals containing the exact references.

    See, the problem is… that when you just say things without supporting evidence, or at least a quote to backup your assertion, then you look foolish, and even wind up looking like someone spreading falsehoods to disparage another person’s words and character.

    You wouldn’t want to look like that, would you? That type of person could wind up casting aspersion, and defamation upon an entire group of people. Again, you wouldn’t want that, would you?

  • JonThomas

    Jeffro… sorry, but where did you get your numbers? Are you an earnest person, or did you get your numbers from somewhere that is not honest or trustworthy?

    First of all, the number of American workers being paid hourly at, or below the Federal Minimum Wage, from the Bureau of Labor Statistics, is 4.7%. So, if we’re rounding, it’s 5%. What’s a few hundred thousand cold, hungry, impoverished people among friends?

    Secondly, and here’s the good part… I think it’s great that you aren’t against raising the minimum wage. The big push is for $15/hr as the Federal Minimum. This means that it is not only the 4.7% that would get an increase, but every worker between the present Federal Minimum, and $15/hr!

    See, your numbers are off. That’s a whole lot more than %5! Did you just not think of that, or did you get your numbers from somewhere that is trying to push an agenda against raising the minimum wage?

    “All this… ‘lifting people out of poverty…’” is not…I repeat, NOT as you called it…. BS!

  • JonThomas

    Thank you.

  • Jeffro

    I’m not sure why you’re arguing with me. I said I’m fine with raising it. But if you’re doing it because I said “4%” and it’s really “4.7%” your insinuation that I’m not “earnest” or “not honest” is a load of crap. I have to ask – are you serious – or are you just a troll?

    You make a valid point about the $15, but that’s never going to happen, so it’s moot. I guess if we were to say it should be $50 you would make the same argument. But it’s not a solution.

    I didn’t say lifting people out of poverty was BS. I know you think you tied up your “argument” with a nice little zinger, but it’s fabricated. I said the argument that raising the minimum wage will raise people out of poverty is BS. It won’t. Even if you raise it to 15/hour, people will have trouble passing $25k a year before taxes since most of those jobs are less than 40 hours. After paying their fair share of taxes and SS/FICA, there is a lot less. Your math doesn’t add up. And there is nothing to indicate other wages will go up because the minimum does.

    The good news for those getting an increase in minimum wage is that they will still be eligible for basically free health care, and they will likely continue to be eligible for other welfare benefits even that rate, so their effective income will be higher.

  • Jeffro

    Since I have a masters degree in America History, I’ve read the texts myself. As you’ve requested, I’ll let you do your own research, so you might try The Federalist Papers and the personal diaries of James Madison and Thomas Jefferson, since you, ostensibly, want to read them yourself and not listen to me. It’s good you want to do your own research. I wonder if you do your own research on all of your original posts, or are you getting it all from MSNBC and Democratic Underground? Don’t get me wrong, I read those sites too – along with their right-wing counterparts – but it’s only part of the picture.

    Your disingenuous comments and back-handed remarks aren’t really worthy of “debate” though. They’re more a indicator of under-education combined with attitude than real knowledge. I suspect you will discard any facts that don’t fit your tiny narrative.

  • JonThomas

    I wrote what I did because you either purposely used the wrong percentage, or you hadn’t thought it through clearly. Either way, your post belittled the effect a Minimum Wage hike would have on real people who are working hard but earning very little.

    Even if the number were $10, or $12 (or $18, whatever,) the number of people who would get a substantial pay raise is much more than 4% (or 5%.)

    You state that you don’t mind if some get a Minimum wage hike, but then you write the idea off as if it’s just about votes! Don’t you know anyone working fast food? Walmart? Supermarkets? Department stores? Waiting tables? These are just numbers until you get to know someone who works very hard for very little.

    As you said in your first post… the “argument for raising the minimum wage seems odd to…” YOU, but it doesn’t seem odd to anyone working for less than what it takes to live! It also doesn’t seem odd to those of us who care about real people, and want to see a system that works not just for the richest, but for every citizen.

  • JonThomas

    Okay, since you aren’t providing any substantial evidence, but simply allusions, then you won’t mind if we ‘under-educated’ (sorry, if us peons aren’t worth your time) just go on as if you didn’t add anything. Oh, wait… you didn’t!

    I was disingenuous, you are right. Somehow I knew you couldn’t back up your ridiculous statements, and it’s not polite, or socially acceptable (not to mention potentially against this site’s comment policy,) to come out and call someone a liar without at least first giving them a chance to back up their words.

    Btw… you still haven’t backed up your words!

    P.S., Sean, I apologize. I hope I didn’t cross the line, do what you need to with this post.

  • moderator

    JonThomas and Jeffro:
    I think you have both made your points clearly. Might be a good time to move on.

    thanks
    sean @ moyers

  • moderator

    Jeffro and JonThomas

    I think you have both made your points clearly. Might be a good time to move on.

    thanks

    sean @ moyers

  • fmendoza

    THE REPUBLICANS ARE THE FIRST ONES TO SUPPORT GIVING OUTRAREGUS BONESES TO FAT CAT CORPERATE CEO’S. BUT WHEN ASK TO SUPPORT A LIVING WAGE. AND WORKING FAMILIES. THEY TURN THEIR BACKS ON THE AMERICAN PEOPLE. THE PLANTATION MENTALITY IS A LIVE AND WELL IN THE YEAR OF OUR LORD. 2014. SO ONCE AGAIN THE PEOPLE MUST RESPOND AND TAKE IT UPON THEM SELVES. TO PASS A LIVING WAGE IN THEIR RESPECTIVE STATES.

  • Mark Burk

    The 1st sentence of the 4th paragraph is simply wrong. A free market is one wherein each party to the transaction is free to enter (or not enter) into the transaction. If such is not the case, then not only are the freedoms of the parties being violated, but from an economic point of view, the transaction itself is not productive. Whether or not either party has “perfect information” (whatever that is) is irrelevant. As such, neither party needs to necessarily have ANY information about the good/service being transacted and it many: the price of the good/service being transacted (compared to other similar goods/services) serves as an indicator of its relative value. Last and not least, it may or may not come as a surprise that no “company”, “business”, “enterprise” anywhere pays wages. All of us in our role as consumers pay wages- minimum wages, maxium wages and all the wages in between. However, because of minimum wage laws, how much we spend (of our own money) is not being determined by us, but rather by the government. Wages are an expense of doing business and as a result, are passed on to consumers. If they aren’t passed on (along with any other expenses incurred by the business), then the company risks eventual bankrupcy @ which point all of us (once again in our role as consumers) do not have that company’s goods/services from which to benefit.