Current Design of Minimum Wage Increases Income Inequality and Stifles Innovation
I came across this USA Today article while sitting at the airport – Minimum Wage Rates May Climb. I felt inspired to throw out another perspective on this issue. The premise of minimum wage was to prevent income inequality. Fair Labor Standards Act passed in 1938; noted wages should ensure a “minimum standard of living necessary for health, efficiency and general well-being,” plus, “without substantially curtailing employment.”
I believe there is sufficient history to re-examine the efficacy of minimum wage. My contention is the current construct of minimum wage not only provides a minimum standard of living, but it also promotes that form of living versus a desire to do better. The “substantially curtailing employment” is objective. In my mind, minimum wage has substantially curtailed employment. In fact, it has also curtailed innovation. Minimum wage has supported the incumbent companies stifling competition and innovation.
Refuting the core efficacy of the current design of minimum wage is easy. Examining the history of income inequality, it shows the value of having the current design of minimum wage has not helped. The below graph I pulled from Wikipedia – of course I have validated it – (one cannot trust Wikipedia 100%).
Many other sites have shown the income equality has only gotten worse with a minimum wage policy (see http://www.ritholtz.com/blog/wp-content/uploads/2011/09/Rising-executive-pay.png & http://www.ips-dc.org/campaigns/tax-dodging-ceos/index.php ) Re-designing the minimum wage and the multiple restrictions in starting and creating a company, I would contend, will create many competitive companies not allowing corporations to outsource and further consolidate wages. Mitigation of income inequality has failed to occur in the time period of minimum wage. We can pretend that it will eventually prove itself, but I will reference Albert Einstein – doing the same thing over and over again and expecting different results is insanity.
For those less numerically inclined, I will try to employ some logical deductions. When one decides to start a business and try something innovative and different, there are many roadblocks developed over time to prevent you from succeeding, largely from the support of the incumbent corporations. One of the key areas of growing a business is expanding through employment. However, as those who have hired before, realize the choices of people vary in terms of work ethic and capability and it is extremely hard to know beforehand. An ideal situation would be to hire multiple employees in hopes of finding the one or two that will just fit in perfectly. Ideally, they would promote that individual to take on greater responsibility with greater rewards. With a minimum wage structure your ability to experiment and hire multiple employees and eventually promote and reward become limited. A cost structure that does not allow experimentation will result in lowering the potential of the individual and the new company. Obviously, an incumbent organization can more afford to employ the strategy of hiring multiple individual to find that star performer, leaving the pool even smaller for the new company.
One of the original reasons that minimum wage exist was due to significant abuses by employers. During those time periods, communications and information traveled very slowly. The sweat shop concerns in the US will be nullified via social network. Much of the US has the ability/access to the internet as compared to the third world employees. An elimination of minimum wage will likely do more to reduce sweat shops since these third world sweat shops are ignored by the general public. Creating a competitive US workforce company will bring the discussion to the forefront.
Another logical deduction is to come from the employee point of view. I could imagine a situation for a young student to work for “free” or very minimal for only the pure desire to obtain knowledge, which can be used later in life. My thinking is focused on enabling the individual to get out and do something with their skill set. It’s rooted in finding and maximizing the ingenuity of the individual. Eventually some of those individuals will create a small business then perhaps a large business. In addition, I am not advocating the removal of all regulations (e.g. building standards – but if one can build to a standard why not allow that person to build – buyer beware in terms of cost). Let us unlock the power of the individual versus holding everyone back.
Given the historical results of the past 74 years, the current design of minimum wage is holding a large segment back. With a re-design of minimum wage and other similar obstacles for new companies, this country will see a resurgence of private companies and employment. A potential re-design solution could be eliminating the minimum wage for companies under a certain income level. These new companies will create a competitive force to the inertia of status quo and make a change to corporations’ ability to outsource and further consolidate wages.
The value of multiple smaller companies can be seen in the shale gas revolution. Shale gas was driven by the smaller independents as the large multi-national companies could not see and/or innovate to produce shale gas.
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