A recent news item called for an increase in the minimum wage. On the surface, this always seems like a kind idea. What could be better than putting more money into the pockets of those who are struggling? Everyone, myself included, sees the merit in that.
The problem is that increasing the minimum wage doesn’t have that effect. In many ways, it does the opposite.
A few years back, in South Africa, I was asked to do a presentation on personal wealth. The emphasis was on differences in approach between self-made millionaires and families caught in inter-generational cycles of poverty. The video went viral and has since been viewed more than two million times.
As a result, Penguin publishers asked me to write several books on the topic. I spent a good deal of time researching additional factors that impact wealth and poverty, and minimum wage turned out to be a big one.
I discovered six ways in which it hurts the poor, perpetuating rather than alleviating their struggle. I’m quite passionate about the topic, having had a somewhat difficult youth myself. I know what it’s like for a family to struggle and to want real answers. For that reason, I speak about escaping poverty at every chance I get.
Here are six ways that a minimum wage hurts the poor.
1. It increases the gap between nothing and a useful start
When people are genuinely struggling, even small amounts of income can make a significant difference. In misguided attempts at kindness, champions of social justice may have such jobs legislated out of existence, calling the pay “inhuman”. Yet the argument is made from a place of some privilege. A wealthy person’s “inhuman” can be a struggling person’s salvation. Take the opportunity away, and you haven’t increased compassion. You have merely reduced an option. This option is rarely replaced by a higher-paid version of the same work. Instead, it is simply eliminated outright.
By Douglas Kruger
Economist Dr Thomas Sowell cites a tragic example in which well-meaning advocates for social justice shut down a so-called “sweat shop” in a struggling south-east-Asian region. The net result was that the young employees, who had previously been happy to work for a minimum wage, were then forced to turn to crime and prostitution instead. There was simply nothing else available, and what little had been on offer was taken away in the name of compassion.
2. It removes an opportunity to geton the ladder
Entry-level employment may not be well remunerated. But it’s also rarely a completely dead end. Instead, it’s a foot in the door.
A person who may lack the skills for higher levels of employment can prove themselves at an entry level at very low risk to a business owner. In fact, a business owner who doesn’t have a position available might nevertheless accept a new employee at low risk, and then subsequently see the value of creating a higher-level position for that person. That is, of course, unless all this is prevented from happening, because the opportunity has been legislated away.
3. It eliminates an opportunity to develop skills
Because it removes an opportunity to get on the ladder, it also removes a means of learning basic work skills. These could include punctuality and time management, learning to co-operate in a team, interacting with customers and learning an attitude of service, rudimentary leadership skills, communication skills, and even the specific skills of the trade germane to the job. This extends to simple things such as adding up money and giving change. Each such skill contributes to an individual’s capacity to graduate to the next level of employment and thereby earn more – except if the opportunity is taken away.
4. It incentivises replacement of people with machines
McDonald’s has proved this repeatedly. Over many thousands of stores, it is easy enough, and financially viable, to pay low wages to entry-level employees. But change that at scale and it is no longer worth it. Businesses then replace people with machines. This not only removes the opportunity for the poorest of the poor to begin their work journey, but the next level up are also fired and replaced by automation. The higher the minimum wage goes, the more this happens, continually increasing the accessibility gap.
5. Everything becomes more expensive, harming those who canafford it least
Add the cost of a minimum wage salary to any item, and that item becomes more expensive. This then hurts the very people who are struggling.
Take the example of bread. It is relatively cheap to make but that means it has terrifically small margins. It is nevertheless manageable, and it can still make profit. But introduce minimum wage at every stage of production and suddenly those margins disappear.
Either the bread-making company disappears, and therefore makes no more bread, or it does what it has to: puts the price up. As a result, the very few, very poor people who do successfully get minimum wage suddenly discover that all the most basic things are more expensive, negating the benefit of their minimum wage. The cost increase has come directly from their wage increase, muting any advantage. And those who can’t get such a job discover that they are now subsidising those who did. At the bottom of the socio-economic ladder, everyone loses.
6. Government interference into economies often does more harm than good
Zooming back, there is a broader principle at play. Other than upholding laws and contracts, government interference into an economy quite consistently does more harm than good. The more you study economic history, the clearer the pattern becomes.
Possibly the most vivid example is from the US, where economists estimate that the Great Depression was prolonged by an additional seven years as a direct result of the government’s attempt to “solve it”. Had they done nothing, it would have ended the better part of a decade earlier.
The “War on Poverty” did something similarly tragic. For several decades, black American wealth had been on a steady upward incline. Then President Lyndon B Johnson declared his “war on poverty” and got involved in trying to solve a problem that was busy solving itself. Instantly, black wealth in America ground to a halt. The growth stopped dead in its tracks. To see it charted on a graph is as saddening as it is instructive.
Kindness and empathy are important. Yet we must be careful not to mistake kindness and empathy for efficacy. If it doesn’t work, it isn’t kind. And it’s more important to solve the problem of poverty than to “look kind” through our policies. Maximum economic freedom is the best solution. If two parties want to contract at a certain level, let them. Forbidding it may make us feel righteous. But it ultimately does more harm than good.
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Douglas Kruger is the author of bestselling books including Poverty Proof, and Is Your Thinking Keeping You Poor? He lives in St Helier but speaks all over the world.
