Building an Economy that Works for Everyone

Trying to eat a free lunch: Why some businesses still oppose a minimum wage

News that Washington’s low-wage workers will receive a 12 cent cost-of-living adjustment in 2012 (per the state’s 1998 voter-approved initiative) wasn’t greeted by local business lobbyists with much cheer. Which is puzzling, because there is clear evidence that a strong minimum wage creates more prosperous customers – and you would think that is exactly the kind of economic stimulus business owners would favor. So what gives?

In the latest study to support the conclusion that a minimum wage is good for business, researchers examined employment trends over a 16-year period for different categories of low-wage workers in every county that shares a common border with another that has a different minimum wage. (For example, Washington’s Spokane County shares a border with Idaho’s Kootenai and Benewah County, while Clark County is across the river from Multnomah and Columbia County in Oregon.)

As The New York Times Economix blog notes, economists Arindrajit Dube of the University of Massachusetts Amherst, T. William Lester of the University of North Carolina at Chapel Hill, and Michael Reich of the University of California, Berkeley found that minimum wage increases 1) had no negative effects on low-wage employment, and 2) successfully increased the income of workers in food services and retail employment, as well as the narrower category of workers in restaurants.

So, given that every employer is also a business of one sort or another that ultimately needs customers who can afford the goods sold by the business, why do some business lobbyists continue to call for minimum wage cuts? The answer is simple: They believe they can get a free lunch – or in economic terms, a free ride.

Here’s how: Imagine that business ‘A’ pays its employees very well, ‘B’ pays decently, and ‘C’ (sans a minimum wage law) pays as little as possible. Each business prices goods competitively, but on average, the economy needs its customers to earn at least ‘B’ level wages in order for most goods and services sold by A, B and C to be affordable.

Now, Business C doesn’t pay enough for its own employees to go shopping, even in its own stores. But it is banking on the two other businesses to continue paying their employees enough to do so, and to use its cost advantage to generate higher profits and more wealth for shareholders. If possible, Business C will also use its advantage to take market share from A and B.

But Business C’s profits are false ones, based as they are the market’s failure to reflect the true costs of its business strategy – namely, inefficiency and inequity. Since Business C employees can’t afford to shop in town, the total pool of available customers shrinks, leaving less market share available for all three companies. Meanwhile, employees of C are forced to go without those goods, or drive to another town to get them, which further limits their buying power.

Put simply, Business C is an economic free-rider using the high wages paid by other employers to subsidize artificially high profits for itself.

Of course, Business A and B could also lower their wages – but in the long run that would mean no employee/customer could afford to buy goods in either A’s, B’s or C’s stores. Alternatively, employees of A and B could boycott C and hope the next business pays decent wages – but that means C’ employees will lose their jobs, at least temporarily, with all the attendant social costs.

The best alternative is to restructure the market by rewriting the rules governing wages – in other words, to legislate a minimum floor for wages. And as the evidence shows, doing so helps ensure the market functions more efficiently and equitably for everyone.

More details about the report – and the long-running battle over the effect of minimum-wage laws – are in today’s New York Times Economix blog.

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