Leslie Landers is a senior majoring in economics and applied math.
In October 2008, the capitalist economic system responsible for decades of prosperity in the United States experienced one of its largest market corrections in history. The economic downturn that followed the crash left millions unemployed, thousands homeless, and ignited nationwide fervor regarding economic equity, equality, and mobility. Devoid of the financial security they once took for granted, and fearful of what was to come, citizens looked to economists for an explanation. While points of blame ranged from the mispricing of risk, to the deregulation of the banking industry, one idea became increasingly prominent: economic theory based on mathematical models of people as rational decision-makers was a faulty representation of a realistic economic system. As employment levels recovered in the years following the recession, the fury over economic inequality manifested itself in a call for a higher minimum wage. In analyzing the current minimum wage debate, economists must recall the analytical missteps that preceded the Great Recession and expand beyond the potentially erroneous economic-mathematical models to consider the human aspect of the debate. Although opponents of increasing the minimum wage provide a logical argument pertaining to possible unemployment and unjust business regulation, those in support of raising the minimum wage have a stronger ethical argument as they consider our rights as humans and our moral obligation to each other.
In a society with a constantly increasing gap between the poor and wealthy, providing an adequate minimum wage is part of our ethical obligation to protect the citizens in the lowest economic class. Historical cyclical peaks and troughs referring to economic expansion and depression are evidence that, if left to its own devices, the capitalistic system will eventually self-correct. But whether by the forces of the invisible hand or the persistence of supply and demand, this self-correction is a lengthy and erratic process. For the imperfect homo finitus at the bottom of the economic ladder, waiting out economic depression is not a feasible option. It is this vulnerable lower class, vanquished by household economic instability, that destroys the image of humans as self- sustaining homo oeconomicus and makes necessary a system designed to serve the unique needs of 21st century families (Prasch and Sheth 4). As strained dual income households and struggling single mothers replace the autonomous male provider, government responsibility reaches beyond protection of property to include the provision of social welfare. By shifting this expectation that all people possess the tools for economic prosperity, citizens accept that some groups require supplementary support and understand that it is society’s ethical duty to provide easy access to that assistance via a higher minimum wage.
Minimum wage increases not only offer the hopes of individual economic gains, but also provide immense improvement in psychosocial development. The omission of utility from cost- benefit analysis due to the concept’s unquantifiable nature means a policy’s positive externalities are often overlooked. Minimum wage provides several of these indirect nonfinancial benefits through its role as a promoter of an individual’s general welfare and psychological health. A study by health economists at the University of Chicago indicates that the empowerment citizens obtain from being self-sufficient, productive members of society consists of increased pride, confidence, and self-respect (Neumark and Wascher 12). But perhaps the most important utility-based psychological benefit comes not through what one individual gains from their own actions, but rather from what the minimum wage level says about the value we place on our fellow citizens. Economist Guy Davidov conceptualized minimum wage levels as an embodiment of our respect for human dignity. He argues that to deny a full-time laborer their rightfully earned wage is implying that their time and effort are not worth the cost to society of feeding these low-wage workers and their families (Davidov 74). Raising the minimum wage will alleviate feelings of worthlessness and instill in the lower class a reminder that they too make up a crucial element of the American economic structure. This notion of inherent worker value, along with increased empowerment, demonstrates that an augmented minimum wage would promote general psychological welfare among struggling, low-wage workers.
Our ethical responsibility to raise the minimum wage is amplified as the effects of minimum wage reach beyond the provision of psychological wellbeing and opens a path toward self-actualization so often closed to low-wage workers. Opponents of a higher minimum wage argue that in an efficient economy, employees receive a wage equal to their marginal product of labor (MPL). Any wages exceeding the MPL are an excessive inflation of a workers true value. These opponents neglect to acknowledge that increased productivity resulting from higher wages could appreciate a worker’s value to a new wage-product equilibrium. As evidenced in studies done on unemployment categorized by education-level subgroups, an increased wage level raises employer’s skill standards thus boosting society’s intellectual capacity by financially incentivizing greater educational attainment (Neumark and Wascher 8). While elevated hiring standards would inconvenience workers who simply do not possess the intellectual capacity to acquire higher education, these laborers can still benefit from increased on-the-job skill acquisition. Higher labor costs provide a financial incentive for the employer to provide additional training, reduce employment turnover, give the laborer the impression that they are valued, and thus increase personal productivity. Collectively, this push for productivity will bring society to the bounds of its production possibilities frontier and create a situation where all resources are being used to their maximum potential, the epitome of a successful economic system. Improved training and more educated workers will improve the overall economy, improve the lives of the workers, and make the United States more competitive in the global economy.
While benefits to low-income populations are without a doubt important, ethical analysis through the utility principle indicates that advantages must affect more than a small minority. Although less straightforward, benefits of an increased minimum wage can directly and indirectly impact the middle and upper class as a result of an interdependent economic system. The contour wage structure proposed by economists Oren Levin-Waldman and Charles Whalen suggests that an increase in the minimum wage would spill over into higher income brackets, shift the entire wage structure upwards, and prevent middle-class wage stagnation (Levin- Waldman and Wahlen 52). Just as low-income citizens gain improvement in psychosocial well- being, middle and upper classes will develop heighted self-confidence as a result of their increased wages created by spillover. This collective improvement in self-respect will encourage broader community participation and lead to increasingly democratic decision-making in local governance. As people become more comfortable with themselves and with each other, society’s focus can shift from survival to self-actualization and government spending can shift from welfare programs that benefit a few to social programs that benefit many. While the minimum wage directly impacts only the 4.7% of Americans earning this salary level, the positive effects of increasing the minimum wage reaches across many socioeconomic classes (Broad). Because increasing the minimum wage can enhance financial and psychological security across society, it is our ethical obligation for the sake of all classes to promote a livable wage.
The effects of a higher minimum wage would permeate beyond domestic borders and fulfill the United States’ ethical obligation as a promoter of capitalism to set high international standards for labor rights. As a global economic leader, the United States has assumed a tacit responsibility to reprimand developing nations for their inadequate workers’ rights laws. Presidents past and present voice disapproval over third-world working conditions while dedicated activists boycott companies for employing sweatshop labor and selfless citizens put aside logical economic decision-making to purchase higher-cost, fair trade products. But before admonishing other countries for their unfair practices, United States citizens must perform an introspective assessment of domestic wage levels. While legal workers in the United States are protected under the Fair Labor Standards Act of 1938, some of the lowest wage earners still encounter crippling hardships and debilitating hunger reminiscent of third world countries. To encourage worldwide labor rights and promote capitalism as the ideal economic system, the United States should be able to show that such a system is successful enough to provide all citizens with livable wages. Acknowledging that history has shown that the capitalist system is indeed imperfect and in need of government intervention, it is reasonable to accept the increase in wage policy as a method to create an equitable and idyllic society and support capitalism. If the United States is going to set an example for the rest of the world, maintaining our credibility as a global superpower requires that all workers receive wages on which they can reasonably survive.
Increasing minimum wage will initially require uncomfortable financial adjustments, but it is our ethical responsibility to accommodate these sacrifices in a bid for long-term Pareto optimality. Various studies have shown minimum wage increases lead to decreased business profits as labor expenses increase and to a rise in unemployment as workers are replaced by technology. While it is true that harming one group to help another is not an ethical way to run a country, the consumer-based market that dominates the United States economy signifies that these consequences are merely temporary. An examination of saving patterns of United States citizens indicates that if low-income populations were to see an increase in household income, that money will be promptly circulated back into the community, spent at the very businesses that initially lost money to higher labor costs. Thus the businesses will make back their previously reduced profits and higher demand for goods will lead to a need to hire the previously laid off workers. Therefore, while it may be true that employment and profits will decrease in the short-run, the labor-capital market interactions mean that the loss will be temporary and in the end laborers and business will benefit from an increased minimum wage. With no parties losing, this becomes a case of Pareto improvement and increasing minimum wage becomes part of our ethical obligation to promote Pareto efficiency.
An examination of the fast food workers rallying for a $15/hour minimum wage will leave little doubt that these activists are not making their argument as experts in the economics field. But as prior tribulations and lapses in economic analysis have revealed, the infusion of a humanistic perspective into economic policy decision-making may not be all that bad. The incorporation of ethical principles into the analysis of the minimum wage debate does not require abandoning all economic theories. Accepting our ethical obligations to protect the lower class, acknowledging the positive psychological benefits that can impact all classes, and recognizing America’s role model status as a global economic superpower are all rooted in the foundations of economic principles. When including these ethical elements in the analysis of the minimum wage debate, it becomes clear that those in favor of raising the minimum wage provide a more compassionate and comprehensive argument than those who believe activists’ call to increase the minimum wage should simply be ignored.