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September 24, 2020

If There Were No Welfare, There’d be No Need for a Minimum Wage

But we do need both.

Let’s go back to the bad old days.

If you had a coal mine or a steel mill or a ranch, you had to assure that your workers and their families could live on the premises or in the vicinity. Sometimes you provided housing or credit at the company store; not because you were a bleeding heart but because otherwise you’d have no workers. The accommodations usually sucked and the company store was a ripoff and credit became a way of preventing people from leaving; but, nevertheless, no one but you, your investors, and your customers paid any of the living expenses of the workers.

Now you say that the state ought to subsidize the housing costs and the food costs of the work force it takes to provide your service or create your goods. Whether we buy your coal or steel or beef or not, we pay for welfare so your workers can live. It looks like we’re subsidizing the workers; but we’re not. They wouldn’t be able to work if they couldn’t live. We’re subsidizing you, the owner, your investors, and your customers.

If you had a mansion or a fancy apartment in the not-so-good-old-days, you had rooms in it for the help and you fed them. Now you don’t want the help so close and zoning assures they can’t begin to afford to live in your neighborhood. So you want the rest of us to build substandard “market priced” housing a safe distance away, throw in some subsidized transit, and supplement the skimpy wages you pay with food stamps and Medicaid and fuel assistance. What if you just paid a living wage? Today you don’t have to pay a living wage because the help can still scrape by thanks to everyone paying for welfare.

Sounds like I’m about to say we could just abolish welfare and the need for a realistic minimum wage would go away. I’m not. That might work from the PoV of a Vulcan economist, but it’s inhumane. There are people who can’t work. There are people who skills do not earn enough to allow an employer to pay them what they need to live. There are those just entering the workforce who are going to very productive but aren’t yet.

Here’s what I recommend:

  1. Raise the Federal (not the State) minimum wage to $15/hour almost immediately. This will not cause all the small stores who can’t pay this much to close since their competitors will have the same costs and the pandemic has shown us how much we need services from people who don’t work from home. We will pay more at the store because we are buying the services of people who deserve to earn more; but we will be paying them to work and they will boost the economy with their spending.
  2. Assure that there is no case where an able-bodied person is being paid the equivalent of the minimum wage in welfare for NOT working and that there are very few cases where those who are earning the minimum wage are also receiving subsidies. If work pays enough, it is its own incentive.
  3. Use some of the welfare savings to pay both the employer and employee share of Social Security and Medicaid on the first $15/hour of wages for say the first five years a person is in the workforce. This increases the take home pay for beginners and reduces the cost to employers of hiring them. Perhaps take the cap off social security payments for higher earners. There IS a real danger of politicians bankrupting Social Security and Medicaid by not replacing the individual payments so we have to watch that.
  4. Establish apprenticeship programs including job-training and a fixed period when a subminimum wage can be paid. These should sometimes be done in conjunction with colleges and trade schools. Those without family responsibilities and those with some savings or parental help or scholarships will be able enter the workforce through these programs. Training loans IMO are a much better use of public funds and better for the recipients than loans to attend over-priced and over-built colleges and the training loans could also lead to a degree.

My freedom-minded friends ask “why should government intervene in the private negotiation between an employer and an employee by stipulating a minimum wage?”

I used to feel the same way myself. The answer is that, without this intervention, needed welfare becomes a subsidy to business owners by allowing wages below the cost of living. The owners are transferring a business cost to the rest of us just as if they were dumping their waste in a river we have to clean up. Economists call this an “externality”. Government has a right and a responsibility to manage externalities; the alternative is the much worse one of government and politically connected “stakeholders” micromanaging every aspect of business.

My friends on the left ask “why can’t businesses just be socially responsible and pay a living wage without compulsion (not that my friends on the left are against government compulsion)?”

The answer is that a competitive business can’t afford to be any more social responsible than its competitors or it won’t be in in business for long (there are counter-examples with fantastic PR but, what works for Ben and Jerry’s doesn’t work for Mom and Pop). Government can and should set the guardrails for the good of both businesses and the rest of us.

A higher minimum wage and accompanying welfare reform will keep America great long into the future.

See also: The Free Market Needs Government to Function

Celebrate Labor Day and Essential Workers by Substantially Raising Minimum Wage

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