The Minimum Wage Isn’t Just a Wage: It’s a Standard

May 16th, 2014 at 9:50 pm

I’ve been doing a bit of historical research for a minimum wage paper and keep stumbling on these interesting and compelling ideas from the framers of that and similar policies (h/t: GL).

Arguments about minimum wages tend to be about two things: will it hurt its intended recipients and the businesses that employ them by raising labor costs, and is it well targeted?  These are, of course, important questions.  But while they were certainly entertained by the framers of the national policy back in the 1930s, their motivation went beyond these narrow questions.  They viewed the minimum wage as a new, national standard.

Labor markets, like the broader economies in which they exist, are social and political constructs.  They operate as much by laws, rules, and standards as by supply and demand.  Laws against child labor, discrimination, overtime without extra pay, wage theft, and more are examples of hard fought standards that most Americans today recognize as integral to the functioning of labor markets.

The minimum wage was conceived in this same spirit.  Testifying before Congress in 1937, Isador Lubin, the Commissioner of Labor Statistics, stressed that the minimum wage “…aims to establish by law a plane of competition far above that which could be maintained in the absence of government edict.”  Other proponents argued that the policy would “underpin the whole wage structure…at a point from which collective bargaining could take over.”

Both Frances Perkins, FDR’s labor secretary, and later Roosevelt himself spoke of putting “a floor on wages and a ceiling on hours.”  In this regard, we see that the framers had a very specific type of labor standard in mind, one that would block market outcomes widely perceived as market failures.

It was not at all hard to imagine back then that left to its own devices, given the excess of supply over demand and the non-existent bargaining power of low-wage workers, the “market” could drive wage offers down to pennies and desperate workers would have no choice but to accept such offers.  Through the Fair Labor Standards Act, which created the federal minimum wage, Congress acted to correct that failure (the act’s objective was summarized as the “elimination of labor conditions detrimental to the maintenance of the minimum standards of living necessary for health, efficiency and well-being of workers”).

To this day, advocates and analysts supportive of higher minimum wages remain motivated by these goals.  Yet the debate rarely invokes labor standards, and instead exists almost exclusively on technical grounds involving employment and price “elasticities” (responses to increases in the wage) and targeting (whether the wage reaches low-wage workers in low-income households).  This emphasis sucks important oxygen out of the room.  Instead of placing the debate in the context of market failure, it becomes a debate about market efficiencies.

No question, the failure of the low-wage labor market was far deeper in the 1930s than it is today—that’s one reason there’s less urgency around these issues.  And no question that market efficiencies must be considered.

But while this isn’t the Depression, there are still too many low-wage workers who can’t make ends meet based what they’re paid, and the research shows that moderate increases in the minimum wage have their intended effect without creating large or even moderate market distortions.  Given those realities, it is essential to reintroduce the concept of labor standards to the minimum wage and similar debates.  To abandon that fight is to accept the persistence of a sub-standard labor market.

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22 comments in reply to "The Minimum Wage Isn’t Just a Wage: It’s a Standard"

  1. Some guy says:

    Thank you. This was a breath of fresh air in the debates in the issue. Government as a means of dulling the pain of economic inequality.

    What I still can’t figure out, though, is why it has taken five or six years of the Great Recession for even just a small amount of politicians to care about those who require wage-based income. Nearly everyone, including Obama, has only cared about investors and investment income since the 2008 crash.

    Unfortunately, I feel like obama’s democratic potential successors -Hillary. Biden (your old boss, right?) , etc will be more swayed by big money, and ultimately do nothing for wage earners.

    Honestly, millions of the ‘unwashed masses’ can drop out of the economy, starve, and die, and you guys (democratic elite) will never care. I feel like most of us are just fodder for the technical econometric arguments that you and your Ivy League colleagues enjoy (do you even associate with non-Ivy grads in real life?)

    I’d love to be proven wrong, though. What kind of odds do you lay on overtime rule reform making a difference, minimum wage going up, or other labor protections happening.

    Oh wait, you guys want to increase immigration and make us working stiffs work harder for our meager existences!!

    • Larry Signor says:

      Some guy has a good first sentence, then he descends to name calling. Jared Bernstein does not deserve your opprobrium. He is hardly one of the “democratic elite” or a back bencher for the Ivy League. FYI, Jared has been an inveterate supporter of “us working stiffs”…see his opposition to NAFTA, long-time support for income equality and a fair wage for “us working stiffs”. Here is a link for “Some guy” and any one else who gonna dis my man Jared:

      That is my take on your silly comment.

    • Fred Donaldson says:

      Mr. Bernstein may not always be 100% in agreement with my views, but his evolution since the White House in recognizing the plight of the average person has been exciting to watch. He and Krugman are two of the most sincere economists, regardless of whether they are always correct. I agree with “Some Guy” on immigration, the minimum wage, but I think he ignores the necessities of nuance that Mr. Bernstein faces in order to remain credible and a force in media.

  2. urban legend says:

    To me it’s very positive that the activists are linking the minimum wage with a “living wage.” Who can really argue against that as a principle, and there seems to be growing disgust with how Walmart et al are relying on the taxpayer to compensate their workers with food stamps and the like. Everyone knows now that it’s not just about teenagers and pin money. On the economic principles side, the idea that incomes must be adequate to support demand is starting to gain traction.

    The negative is worry about the impact on small businesses, and advocates need to shore up their story there. One thing that should be emphasized a lot more — a whole lot more because I never see it said — is that when the minimum standard of decent pay is raised, the small business’ competitors face exactly the same issue. When they’re all in the same boat, more money in the hands of potential local customers (offering some leeway to raise prices), more employee satisfaction, less turnover and training costs, etc., can be seen as genuine upside offsets to the downside.

    We need simple stories to defeat their simple stories.

  3. save_the_rustbelt says:

    Liberal economists, and liberals in general always seem to start with the assumption that every business has bountiful cash flow and the owners/managers are greedily sucking up all of the bounty.

    I’m not opposed to an increase, but the Obama administration seems to subscribe very enthusiastically to the idea above. Not every business is Google or Microsoft.

    Jared, how many times did you use the word “business” or the phrase “cash flow” in this commentary. I’m adjusting to new tri-focals, maybe I missed some.

  4. Sandwichman says:

    Time for a little “fireside chat”:

    The proposition is simply this:

    If all employers will act together to shorten hours and raise wages we can put people back to work. No employer will suffer, because the relative level of competitive cost will advance by the same amount for all. But if any considerable group should lag or shirk, this great opportunity will pass us by and we will go into another desperate winter. This must not happen.

    To the men and women whose lives have been darkened by the fact or the fear of unemployment, I am justified in saying a word of encouragement because the codes and the agreements already approved, or about to be passed upon, prove that the plan does raise wages, and that it does put people back to work. You can look on every employer who adopts the plan as one who is doing his part, and those employers deserve well of everyone who works for a living. It will be clear to you, as it is to me, that while the shirking employer may undersell his competitor, the saving he thus makes is made at the expense of his country’s welfare.

    Compare FDR’s warning about the consequences to the country’s welfare of the “shirking employer” to the blandly one-sided analysis of unemployment as a “worker discipline device” in the so-called “efficiency wage hypothesis” that purports to provide a “microfoundation” of contemporary economic analysis:

  5. Indiana Patriot says:

    Really? US better off than in the 1930’s?

    We are way, way worse off than in the 1930’s. Labor force participation is a joke and if you count the six million people in prison and the tens of millions living off off debt in college or graduate school we have double or triple the unemployment of 1932. Plus we have gigantic trade deficits and a currency valued at stratospheric levels.

    We’re looking at a currency crisis and total collapse before 2020 that leaves 75% of Americans unemployed and the country completely ruined. The 2010s will make the 1930s look like childs play.

    • jonas says:

      You’re right! Breadlines are nothing! What really matters is how hard it is to profit off the carry trade! All of those workers and companies and whatnot exist solely to generate arbitrage opportunities! And if it weren’t for the Fed, I’d be rich now!

      I actually think you are too optimistic. My model says that we will have a total collapse in 2011 that leaves 150% of Americans unemployed!

    • jeff says:

      Yes, those ‘exceptional nation’ people will never mention our world leading incarceration rate. It mars the story.

      • Brutus says:

        In former times, segregation largely protected whites from criminals. When we undid segregation, whites felt a need to come up with a new way to protect themselves from criminals. In many ways, locking up individual criminals is more humane than “locking up” the communities from which the criminals (disproportionately) come, though it is massively more expensive.

  6. jeff says:

    It may be the US economy needs low wages to function. This is just a sign of an economy with many weak uncompetitive companies. The same as any other developing nation, which much of the US has become outside pockets of wealth.

  7. KURT MUDGEON says:

    Unemployment of inner city teens is a disaster. Does anyone in their right mind wonder if raising the minimum wage would make the problem better or worse?

    • urban legend says:

      Of course we do, and the conclusion is that more money being spent will end up putting more to work. In what possible way does keeping wages low help anyone? The employer has so much work to be done, and isn’t going to hire someone just because the wages are low if there is no work for them to do. That’s the same kind of thinking as buying something you don’t really want just because it’s on sale. Dysfunctional consumers might do it. Business owners do not.

      If the competitors are in the same boat and they don’t want to lose business by dropping workers because there won’t be enough, the owners, like their competitors, will bite the bullet and figure out how to manage the business with minor profit and management compensation reductions at most (if any are necessary at all), more efficiencies and with potential customers having more money to spend, more business. Empirical data shows that minimum wage increases simply do not increase unemployment.

    • Fred Donaldson says:

      Mr. Bernstein may not always be 100% in agreement with my views, but his evolution since the White House in recognizing the plight of the average person has been exciting to watch. He and Krugman are two of the most sincere economists, regardless of whether they are always correct. I agree with “Some Guy” on immigration, the minimum wage, but I think he ignores the necessities of nuance that Mr. Bernstein faces in order to remain credible and a force in media.

  8. tx_rick says:

    Unfortunately, there seems to be a basic lack of economic understanding by urban and sandwich… Let me help describe some scenarios…
    1) assume we they are right, no harm comes to the companies as everyone has higher costs (and higher prices to offset these costs). The outcome is a cycle of inflation, as now the wage is not sufficient as all of the prices have gone up – so let’s raise the wage again which, in turn, raises prices.
    2) or, more likely, the owners know that labor and capital are interchangeable. So, we end up seeing owners reduce the number of employees by offering self-service: like self-service gas stations, self-service grocery check out, … Now price do not rise as much, and the remaining employees are better off. However, the terminated employees are much worse off. This type of response is likely, as American consumers really like low prices (see, e.g., WalMart’s success) and even at the expense of service.

    Finally, this article and related comments do not even address the issue of how minimum wage jobs are first-jobs for many teens entering the workforce and learning how to be productive and responsibility. This was true for me, as well as for my children.

  9. CapitalistRoader says:

    “Empirical data shows that minimum wage increases simply do not increase unemployment.”

    Nonsense. The black, male unemployment rate dropped steadily as the real minimum wage dropped steadily during the entire decade of the 1980s. That a higher government-mandated minimum wage increases unemployment – especially minority and/or youth unemployment – used to be common sense across the entire political spectrum. For instance, the headline of a Jan. 14, 1987 New York Times editorial was : “The Right Minimum Wage: $0.00”. Unfortunately, muddled thinking today reigns among the “progressives”, especially the progressive elites. Else, why not raise the federal minimum wage to $50/hour? Then everyone would be middle class or higher, right?

    • urban legend says:

      Except that labor and capital are not necessarily interchangeable. Your problem is that you are falling into the trap of believing there are immutable laws governing this stuff, no matter the specific circumstances. CapitalistRoader has the same problem with his silly $50 per hour comment. Those of us who think a raise now would be desirable, even to $15 an hour over the course of about three years in order to put the minimum in the living wage ballpark, are dealing with the current situation where, among a number of considerations, there has been no change for five years and had been no change for 10 years before that; the current minimum is far below where it was a generation ago in real terms; it is clear to most people that inadequate consumer demand is dragging down the economy; yet employers are sitting on high profits and top management compensation is extremely high in historical terms.

      These Econ 101 comments are useful considerations, but they do not address the realities we face now. Economics is a social science that deals with complex societies in all their permutations, not Newtonian physics. For the majority of minimum wage increases since World War II, employment went up over the following 24 months instead of down as conservative economists predicted.

    • urban legend says:

      How about a citation with data that can be examined to support this claim about black, male unemployment in the 1980s? That sounds like one of those opposition talking points that don’t stand up well to real examination.

  10. bakho says:

    Minimum wage has a side benefit of increasing productivity. If a minimum wage must be paid, an employer will invest in tools and training to increase worker productivity. Absent a minimum wage, an employer could hire more workers to do things inefficiently. Remember, most workforce training in the US is “on the job”.

    Wages that are too low do not leave workers with enough money to sustain demand in the domestic economy. Too much of the economy going to the filthy rich and not enough to the lower end is a major factor in our current economic situation.

    • Antonio Walker says:

      “Absent a minimum wage, an employer could hire more workers to do things inefficiently.”

      I completely agree!! The minimum wage keeps all those unproductive workers out of a job and back at home where they belong!