How Would You Live On the Minimum Wage?

This post starts with a question because the answer could determine how you might vote in Congress (or for Congress) on the proposition that the current Federal minimum wage should be raised over the next two years to $10.10 per hour.

That staged increase would bring the annual total compensation for a 40-hour "full-time" worker to $21,000 per year. This figure has been attacked by the Republican Party generally as a job-killing burden on businesses nationwide. No doubt it would have an even greater adverse impact on non-profit employers. Many within the Party have also suggested that decisions on minimum wage levels should be made -- if at all -- at state level to better reflect localized cost-of-living differences: Manhattan is way more expensive than Kansas or West Virginia.

Moreover, some commentators assert that there should be no minimum wage at all. This does not mean that slavery should be reinstated, although if to taken to its logical conclusion, it gets close -- the slaves could be said to have been worth only "room and board." Likewise, unpaid internships would become much more prevalent as college students would be forced to work just for the "value" of experience. But the logic of absolute free market economics cuts both ways. College football players, for example, if judged by the prices paid by ticket holders, would seem to be "worth" much more than their scholarships provide.

Nonetheless, the advocates of rolling back the minimum wage have been successful for five years in preventing any increase in the Federal wage floor. In the wake of the damage done to consumer buying power by the great Recession, the argument that one's pay should reflect only what his or her skill is worth to the market resonates with many. If one's skill is only worth say $2.00 per hour to an enterprise in terms of what its clientele will pay for it, then that's what the wage should be. Business should not be forced to "overcharge" consumers in order to subsidize the social cost of supporting someone who has only $2.00 worth of skill to work with. Under this purist "free-market-capitalism" creed, it is indeed the taxpayers who should decide upon and pay for Medicaid, Food Stamps and Disability payments, as well as any direct income supplements like the Earned Income Tax Credit rather than the employer and his or her customers.

Ironically, one of the heroes of the political Left that today advocate strongly for increasing the minimum wage -- John Maynard Keynes -- actually felt exactly the same way as demonstrated in the recent meticulously documented book, The Battle of Bretton Woods, by Benn Steil. Keynes, wrote Steil, specifically argued that "tax-financed wealth distribution was a 'wiser' way ... than 'fixing wages of individuals at a higher figure than it pays their employer to give them'" (Ch.4, p. 82). Rush Limbaugh could not have said it better, so he has often repeated this mantra, perhaps not realizing that he was quoting the revered (and reviled) British economist!

And yet -- is this the world we really want to live in? Perhaps the "subsidy" question is being put the wrong way. If we start with the premise that businesses should compensate their workers only what their customers are willing to pay for, and then proceed immediately to the conclusion that the customers are only willing to pay the barest minimum, rock bottom for unskilled labor, then to be fair to the "free-market' principle, we ought to eliminate each and every subsidy business receives from the government starting with all the usual tax breaks like deduction for payroll payments, oil-depletion allowances, fast capital equipment write-offs, etc., to keep all "distortions" out of the price bargain with consumers.

There is also the more utilitarian argument that without minimum wage levels to put a floor under the base pay level, there would hardly be enough customers to drive demand for a whole range of products. Henry Ford, a very practical man, figured this out when he effectively created a "living" minimum wage ($5 per day) for his assembly-line work force.

Then there is the fundamental human matter of moral choice. As President Obama and others have asked: should anyone who holds a full time job be forced by the laws of supply and demand to work for poverty-level wage? But can we rightly ask a business to undertake this responsibility given their duty always to put "shareholder value" first and foremost?

The answer is clearly yes if we consider the fact that, the Roberts Court notwithstanding, corporations aren't really actual "people." They are more precisely artificial persons constructed by law to provide a vehicle for aggregating capital for commerce (or even non-profit activities) without attaching unlimited liability to the providers of that capital for all corporate acts and debts. In general, if you own stock in a company, you can only lose what you paid for that stock, not what the company may owe to a debtor or an injured consumer. That is a legally privileged status that clearly can justify some level of public benefit in addition to the absolute pursuit of shareholder value. Even in a "free market," there is a bargain to be struck with the public that grants corporate shareholders the privilege of limited liability.

Voters therefore are free to decide -- independent of absolutist economics from either side of the political landscape -- whether they believe such a bargain should be struck around the subject of minimum wages as a baseline for the well-being of our economy generally. In doing so, each voter can decide first whether anyone (including himself or herself) can truly 'live" -- or support a family -- at today's current minimum of $7.25 per hour, or $14, 560 per year -- and that's before Social Security and unemployment taxes. They can then decide whether they believe taxpayers should alone carry the burden of lifting minimum wage earners out of poverty, or whether it might be appropriate to inject a higher level of minimum standard pay into the economy at large to share that burden with those who make use of even unskilled labor to fill their own consumer needs.

For decades, our citizens have agreed on a bipartisan basis not to be pure "Keynesians" or "anti-Keynesians" on the issue of minimum wage, but rather to split the burden of fighting worker poverty between taxpayers and enterprises. We should keep doing so. Let's make a deal!


Terry Connelly is an economic expert and dean emeritus of the Ageno School of Business at Golden Gate University in San Francisco. Terry holds a law degree from NYU School of Law and his professional history includes positions with Ernst & Young Australia, the Queensland University of Technology Graduate School of Business, New York law firm Cravath, Swaine & Moore, global chief of staff at Salomon Brothers investment banking firm and global head of investment banking at Cowen & Company. In conjunction with Golden Gate University President Dan Angel, Terry co-authored Riptide: The New Normal In Higher Education.