Economic and Social Issues of Poverty (and why Minimum Wage should be eliminated)

I don't know where I'm going with this post yet so bear with me if we wander a bit...

I often find it funny to see politicians speak of poverty solely as an economic issue.  New legislation could be introduced which could create the 'perfect storm' of economic conditions for lower class people and there still would be poverty.  To follow me, you'll have to work under the agreement with me that we are a product of our environment.  This could be the topic of a whole other blog post, but basically the argument is that if young Scotty is always told that he will not be successful, that its impossible to be successful, and that no one in his family was ever successful so he can't be successful- Scotty will not be successful, in whatever terms 'successful' may be. This argument is made by several personal development books such as Think and Grow Rich.

The fact that we are, to a significant degree, a product of our environment is the social side to the poverty problem.  The power of the 'self-fulfilling prophecy' principle far surmounts any economic conditions that may encourage fiscal growth of the lower class.

Now that I've made it clear that I believe no economic legislation will single handedly solve financial problems of the lower class, I feel more comfortable to present the following economic logic:

Minimum Wage Should Be Eliminated

You've come with me this far and you're pot committed with this blog post so keep following me.  Here's what I got:  The incremental gain an individual receives from minimum wage is materially less than the incremental increase of goods and services that is brought on because of the additional expense minimum wage causes to businesses.

A hypothetical example:  John, who is getting paid minimum wage as a gas station attendant, has less buying power than if his boss didn't have to pay him minimum wage.  If John was only paid the market rate for his job, let's say it would be $4/hour, he would have more buying power because of the decrease in the goods and services he buys(milk, bread, gas, cable, cell phone bill, etc).  While he would be getting paid less, his cost of living would be even less because business owners will only pay the market rate for labor rather than an institution placed on businesses by the government(minimum wage). The incremental gain an individual receives from minimum wage is materially less than the incremental increase of goods and services that is brought on because of the additional expense minimum wage causes to businesses.

-Counterpoint:  The cost of goods and services will not decrease because businesses will take the labor expense savings and pad their bottom line.

-Ahhh, but the beauty of a completely market based economy!  Competition will force prices down to their proper points.

-Counterpoint:  Not all businesses employ minimum wage people so there is no decrease in the price of goods and services in that instance.

-While, say a consulting firm, may not employ minimum wage people, it's vendors(the payroll company, workers comp company, janitorial service, building owner, website hosting company, insurance company, healthcare provider,  computer manufacturer,  internet service provider, furniture company, office supply vendor, energy provider, and so on) do employ minimum wage employees.  And the consulting firm's vendor's vendors do as well.  The expense savings will be passed on, again, due to competition.

Following the common economic logic that all demand is derived demand(meaning all demand, even B2B demand, is derived by the consumer) the lowered price of B2B goods and services will impact the everyday consumer.

Its important to note that we're operating under several assumptions(some that haven't even come to mind yet):

   -A significant majority of the lower class have minimum wage jobs or compensation that uses minimum wage as a benchmark.

   -The market rate for most minimum wage jobs would be lower than the minimum wage.

I want to make it clear that I don't believe this would solve poverty or a quickly growing income gap in our country.  This is far more of a social issue than an economic one, but I do believe, however, that it would give the lower class more purchasing power.  As far as the social issue is concerned, I believe that more of a bottom up/grassroots approach is needed to see progress.  By this I mean, organizations, people, and a value system that puts growing generations in a positive environment.  This could come in the form of organizations such as Big Brothers/Big Sisters or parent outreach programs.  This is, again, based off the self fulfilling prophecy principle.

Here's where I get stuck- how do we fund these types of programs while increasing the purchasing power of the lower class via eliminating the minimum wage.  Especially when the government is not incentivized to decrease tax revenue(lower taxable wages = lower tax revenue for the gov).  Or am I missing something here??

The point of this blog post is not to push my opinion on anyone.  It is just an expression of the learning process.  In order to never stop learning you have to test different theories-so don't hold me to this.  But I need more counterpoints, thoughts, insights in order to further test the theory.  You've seen all I got so far.

So please comment and/or pass this on to someone who would interested in this conversation...

 

Comments

[Mike Alfred]

I think you may have lost me a little bit. First of all, I don't believe that just because a person is told repeatedly that they can't succeed, that they won't succeed. In fact, I think there are a number of great examples of people who were born or raised in difficult environments who were still successful, usually because of one singularly powerful influence like a teacher, mentor, or an inspiring book or idea. This influence acts as a beacon of light in a life of darkness and despair. There are examples of two brothers (that I've read in books) who have an alcoholic father who beat them mercilessly. One brother is drug-addicted and accomplishes little while the other becomes a successful doctor. Bottom line, I think most people now believe that the nature vs. environment argument does not have a straightforward or clear-cut right answer. In most cases, both influences play a part and in some instances one of the two plays a significantly larger role.

So, you lost me a little bit on this first assumption. I also was a little confused on how it's in anyone's best interest to have an already poor person consume less. I'm not a trained economist but I don't think that paying poor people less will have a huge impact on pricing for basic goods and services. It's an interesting theory but I don't think cell phone prices will go down just because less people are using wireless services. Verizon Wireless quite frankly doesn't care too much how many poor people can afford their services because they have already paid for the bandwidth and spectrum and the amount of people using their services (as a tech company) doesn't dramatically affect their internal costs. In addition, Verizon, like most companies, makes their real margins from their premium clients who buy Blackberries, mobile internet, etc.. and are willing to pay $150 per month for service. So whether 10M or 100k people use their networks, they have pricing power as long as the other companies dont dramatically undercut their pricing model.

Poor people aren't large consumers of gas partly because they don't own SUVs and other large inefficient land vessels. Why do you think gas prices have gone up so dramatically since the dawn of the SUV? Even if every household nationwide with less than 30k in income completely stopped filling their tanks with gas, I doubt it would make a large enough dent in gas prices (when you consider that a lot of the cost of gasoline at the gas station level has very little to do with actual demand at the gas station level but more to do with global crude prices, refining costs, and other secretive costs that the oil companies don't want us to understand) to compensate for a significant drop in the wages of the lowest class.

If I am a closet socialist, so be it. But I think that pure capitalism and globalization must have his limits. At some level we need to allow for a baseline of human justice for all people -- including those without Ivy-League degrees, wealthy parents, or the use of all of their basic faculties like sight and hearing. I believe that a minimum wage is necessary to protect those who can't be protected. I'm not advocating for handouts but merely a standard wage that can't be violated for the purposes of basic human dignity.

[Micha]

I do agree we are a product of our environment to an extent but like Mike I don't agree that its a certainty, there are definitely lots of people who break through that barrier and spark change for generations to come. I also don't see the connection with being a product of your environment with the minimum wage debate.

Looking at your minimum wage theory on its own I feel that it is highly valid as competition and free trade will create competitive wages without needing a government imposed limit on what we pay people. I don't think we can assume that lower wages would trickle down into lower costs of goods and services. There are several other factors that could influence pricing, the impact from minimum wage shifts will be largely dependent on the ratio of input it has to the production of those goods (which in our country is rather minimal).

I feel like you are looking at two separate issues here which need to be worked through independently, being a product of our environment (social issue) and we as a nation can impact that and eliminating minimum wage (economic issues) and what those effects would be. I would not be surprised if we removed minimum wage and average wages for lower class America were not materially affected.

[Susan RoAne]

Nick,

Nick,
You have obviously given this some thought. While a philosophy of the Think and Grow Rich has its purpose and it's an inspiration to many, it's not rooted in sound economic theory. Historically, the mininum wage protected workers from those employers, companies and bosses who took advantage, and dare I say, abused them. If the elimination of minimum wage would be supplanted by a system where people would be fairly paid their worth, that would be a welcome step forward.

[SBL - Video tagging]

This presentation differ from other blogs...It is good...
Regards,
SBL – Video tagging