There is a better alternative to raising the minimum wage

The U.S. Secretary of Labor Thomas E. Perez wants to raise the minimum wage.

In fact, the vast majority of Americans — 91 percent of Democrats, but also 76 percent of Independents and even 58 percent of Republicans — are in favor of raising the minimum wage.

This is an understandable position. After all, the gap between richest and poorest has grown very wide in recent years. But in my view, minimum wage laws are not good laws at all. That’s not out of lack of compassion for low-wage earners, or because I like inequality. That is because I think that there is a better way to achieve a decent standard of living for the poorest in society.

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The minimum wage is a factor in creating unemployment. Despite what's often said to the contrary, it's true: Countries with no minimum wage tend to have much lower unemployment. Right now, America is suffering a serious deficit of jobs, with over three jobseekers for every available job. We need all the jobs we can get.

So how does the minimum wage create unemployment? Minimum wage laws are a price control. They dictate the minimum level that a company can pay a worker. If the minimum wage is $10, and a company wants to take on a new employee that they determine will be worth $8 an hour, they have a choice — either pay $10 an hour, or not hire the employee. Sometimes, the company will accept a hit to their profit margin, and pay the employee $10 an hour. Sometimes they will just not hire a new employee at all. Or, increasingly, sometimes they will go overseas and hire an employee elsewhere — like China — where wages are far lower. This is a particularly cruel scenario because it discriminates most against the poorest and youngest workers in society.

Empirically, the minimum wage has failed to reach its goal of ensuring a fair wage for low wage workers. Worker productivity in America has risen and risen, yet the minimum wage has not. As this chart via Dean Baker shows, it has severely stagnated:

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I propose abolishing the minimum wage, and replacing it with a basic income policy, a version of which was first advocated in America by Thomas Paine. Individuals would be able to work for whatever wage they can secure, meaning that low-skilled individuals — especially the young, who currently face a particularly high rate of employment — would have an easier time finding work. And the level of basic income could be tied to the level of productivity, to reduce inequality.

There are two kinds of basic income policy. The first is a negative income tax — if an individual’s income level falls beneath a certain threshold (say, $1,500 a month) the government makes up the difference. Funds for this could be accessed by consolidating existing welfare programs like state-run pension schemes and unemployment benefits, and by closing tax loopholes and raising taxes on corporate profits and high-income earners. Germany has enacted a similar policy — called the "Kurzabeit" — and it's been credited with shielding the German labor force from the worst of the recession and keeping their unemployment rate low since.

The second is a universal income policy, where everyone receives a payment irrespective of their income. This would obviously require more funds — meaning higher taxes — but in a future where corporations are making larger and larger profits while requiring fewer and fewer workers due to automation, such policies may become increasingly feasible. There are already very serious proposals to initiate such a scheme in Switzerland.

The most widespread criticism of basic income policies tends to be that they might encourage laziness. If you don’t have to work for a living, why would you work at all? But I don’t think this stands up to the evidence — America already has a welfare state — and there are still more people looking for jobs than there are jobs available. A basic income is basic. It does not make you rich or successful — it simply ensures a minimum standard, with a minimum of bureaucracy and without setting any price controls. People would still have many personal and financial incentives to work and to become entrepreneurs. If anything, the fact that there is no longer a minimum wage would probably create more employment, not less.

The minimum wage is a well-intentioned idea. But it has not proven successful, and it creates obstacles to employment. There is a better alternative — and the sooner American politicians discover it, the better.