The fight for a $15 minimum wage has become a flashpoint in society. We recently told you about what would happen if this liberal dream became a reality (spoilers: it was complicated). But there’s another side to this utopian wish. One that hasn’t been an issue in the USA since 1938. What would happen if there was no minimum wage at all?
It sounds like a capitalist’s dream, and a socialist’s nightmare. Yet the truth is far more complex than either might like to think. Scrap the minimum wage, and all or any of the following good, bad, and indifferent things could potentially happen:
10. Lower Unemployment
Here’s a quick question: what connects the European Union countries of Sweden, Italy, Denmark, Finland, Cyprus, Austria, and (prior to January 2015) Germany? The answer is that none of them have minimum wage laws. Yeah, even Sweden. Know what else connects them? On average, they have lower levels of unemployment than the rest of the EU.
This has been the case for as long as people have been collecting data on EU unemployment, but it became especially pronounced after the 2008 financial crisis. By 2012, the countries without minimum wage had unemployment levels that were on average up to a third lower than those with. Clearly, something was driving this trend.
Minimum wage laws represent a cost a business has to absorb. When such laws are strong, managers are less willing to hire. Conversely, if you scrap the minimum wage then employers are much more-willing to take a punt on someone with no experience, or a lack of skills, or no formal education, as it only costs them as much as they’re willing to pay. This can take an axe to unemployment figures, getting the economically unproductive into the workforce.
9. Rise of the Unions
The no-minimum-wage countries cited above are all, by-and-large, economic success stories with a decent standard of living. But there’s another side to them, too, one that might be anathema to those who dislike socialism. They’re also home to extremely robust, powerful workplace unions.
Non-minimum-wage developed countries allow their citizens a good standard of living by letting them use collective bargaining to secure a wage. Nearly every worker in Sweden, Denmark, Finland, and Italy, plus minimum wage-less non-EU states Norway and Iceland, is unionized. In effect, this means they have a minimum wage, negotiated for them by their union. The flexibility comes in allowing different industries to negotiate different rates, according to their circumstances and the type of people they employ.
In practice, this means that, to stop the abolishment of the minimum wage from affecting the living standards of low-earners, a strong culture of unions might have to rise up to keep unscrupulous employers in check. If people currently on the national minimum feared they were in danger of losing money, unionization would become near-inevitable. Not a free-market paradise at all, in other words.
8. More Starter Jobs for the Young
Youth unemployment currently stands at around 10% in the USA. In parts of the EU, such as Greece, it is as high as 50.3% (for the highest in the world, you’d have to visit Bosnia, where it stands at nearly 60%). Evidently, young adults with nothing to do and no way to contribute to the economy are a significant global problem. But what would happen if you abolished the minimum wage? There’s a good argument that a lot of those kids might suddenly find themselves with jobs.
Teenagers and young adults who aren’t in education typically have few skills, need lots of training, and are prone to flakiness. This is a grand generalization, but that’s how hiring people see it. So, when faced with the prospect of paying $7.25 per hour for someone who needs work and might have attitude issues, or paying $7.25 for a responsible adult who has been in the industry for a while, most employers choose the latter. Why wouldn’t you, right?
But, in a world without a minimum wage, suddenly the calculations are different. For example, $2.00 an hour is a lot easier to write-off if things screw up, and the potential rewards (a hard-working, loyal employee) are worth far more to you. Suddenly, it makes sense to start hiring those kids, potentially leading to a yuge decrease in youth unemployment and giving kids opportunities they might not otherwise have.
7. A Sluggish Economy
There’s one immutable fact of life: Those with more money tend to spend that money. This means dollars pouring into the local economy, whizzing around and making everything from the local 7-11, to the diner on main street, to your gym teacher’s illicit marijuana business more profitable. It’s good for business-owners. It’s good for local government. One easy way to trigger this spending spree? Instigate a minimum wage.
In 2007, Congress authorized a mild increase in the minimum wage. The knock-on effect was increased consumer spending in 2008 and 2009, despite a massive recession walloping the American middle class right in the face. Those increases, in other words, helped shield the economy when it needed it most.
Governments know you need money in your bank account to keep the economy ticking over. That’s why very few developed economies are willing to axe both the minimum wage and trade unions together. If people feel squeezed, they’ll stop spending. Abolish the minimum wage and many people will feel squeezed alright, potentially leading to a sluggish economy that benefits nobody. With warnings already rising of another recession just around the corner, now would be the worst possible time for that to happen in.
6. Delayed Automation
At some point in your lifetime, a robot is going to take your job. We don’t care if you’re a till jockey, a cab driver, a CEO, or an internet list-writer (aw, dang it); one day, AI is going to get so advanced it’ll be child’s play for a machine to do whatever the heck it is you sweat your cajones off doing. And it’s going to happen sooner than you think.
Obviously, this poses a lot of problems for future governments and businesses, but that’s for another article. Right now, we’re only interested in the next few years. And that’s where the issue arises. Plenty of jobs already have been automated. Plenty more are on the way, or potentially could be if employers were willing to cough up the cash. The first that are gonna go? Minimum wage jobs.
At some point very, very soon, it’s gonna make a lot more financial sense for a company to use an automated system instead of a human. Not with all jobs. Some, such as cleaning, remain hard for a robot to do effectively. But plenty of others will be effected.
Although this robot revolution is probably inevitable, scrapping the minimum wage could delay it in the medium-term. If there’s no set amount a workplace has to pay a worker, it takes longer for machine-employees to become cost-effective. This means the unskilled can remain in jobs for longer, and humanity gets an extra few years to prepare for our new mechanical overlords.
5. Difficult Negotiations
One of the big positives about eliminating the minimum wage is it allows employers to pay each employee what their labor is worth. However, this puts some workers at an unhappy disadvantage. Those who are young, shy, or inexperienced can easily be taken advantage of by unscrupulous employers looking to pay them far less than their work is worth.
The trouble with a sudden, total scrapping of the minimum wage is that everyone would be forced to negotiate their wage with their employer before starting. No problem if you’ve got a tradeable skill or confidence by the bucket load, but if you’re one of those people who often gets taken advantage of… well, let’s just say you’ll be completely, utterly screwed.
Obviously, this is only a downside if you have any feelings of empathy towards the terminally meek (and if not, hey, congrats on finally managing to exorcise the last remnants of your soul). But even then, there’s another side of this to consider: the employers’. And you’d better believe negotiating dozens of different wages for different employees is gonna be a gigantic pain in the gluteus maximus.
If the business is small enough, it can also bring unwanted uncertainty to budgets. After all, how can you plan for the future if you don’t know whether your new employee’s gonna be receiving $2 per hour, $3, or $7.50?
4. No More Undercutting Wages
Globalization pissed a lot of people off. For all its undoubted benefits, it let big business undercut its employees’ wages by outsourcing to Latin America or Southeast Asia (or wherever). There’s a reason that calling up AT&T will get you through to some dude in the Czech Republic, or calling BT from Britain will get you put through to India. It’s cheaper to hire someone in a smaller or less-developed economy to do the same work. And that means people in the company’s home country lose those call center, manufacturing or clothes-making jobs.
In a world without the minimum wage, those jobs don’t have to leave the country. True, Americans might well have to accept conditions and pay that they are unused to, but many might be willing to in order to just have some job. There’s a fairly convincing argument to be made that outsourcing and undercutting are almost entirely down to minimum wage laws. Abolish those laws and you’ll staunch the flow of jobs overseas, by making it cost-effective for a company to keep operating in its homeland. For those living in a depressed, post-manufacturing small town, it could completely change their lives.
3. Increased Inequality
Inequality is killing us. The best-selling economics book The Spirit Level effectively argued that increased inequality can lead to worse health and lower life expectancy for people all up and down the social scale, even the super-rich. As a result, governments across the world have pledged to tackle ingrained inequality. One way they could reverse all that progress? Abolishing the minimum wage.
We can infer this from the case of Britain. In 1998, the UK introduced its first minimum wage at £3.60 an hour (now at £7.20). According to The Economist, inequality subsequently shrank across the scale. In other words, it wasn’t just the working class and working poor who got more-equal. The middle class found themselves closer to the upper-class, and those at the bottom of society also benefitted. The entire scale of inequality shrank, creating a society noticeably less-prone to the problems identified by the authors of The Spirit Level.
As a result, we can infer that things would travel in the opposite direction if the minimum wage disappeared overnight. Given that many already blame America’s crazy political polarization on its Hunger Games-style levels of inequality, this may not be a good thing.
2. Burdens Shifted from Employer to Government
Do you believe that it is the responsibility of governments or companies to help people out of poverty? Let’s assume that it’s someone’s responsibility, if only to stop exciting Victorian things like rickets and slums from staging a comeback. If you believe it is up to government to shoulder the costs of the poorest in society, then abolishing the minimum wage might well be the best way to achieve this.
The answer lies in tax credits, currently a big part of the American and British welfare systems. Tax credits essentially pay for a big chunk of the working-poor’s taxes, leaving them a few thousand dollars a year better off. They also allow employers to pay their workers less, without affecting the workers’ quality of life. Instead, the burden is shouldered by the government. Not only are both the employee and employer better-off, evidence shows that tax credits generally get more into work – a win from the government’s perspective.
If you removed the minimum wage while creating and sustaining a strong tax credits system, you could reap all the benefits of a world without minimum wage, without having to absorb the negatives. Ethically (if that’s your thing), it also removes the thorny issue of government interfering with the rights of employers, something anathema to those on the right.
1. Absolutely Nothing Happens
After all those possible positives and negatives of a minimum wage-less world, we’re now about to tell you that it could all be horse manure. According to one analysis, completely scrapping the minimum wage could potentially have no discernible effect whatsoever.
This is related to the idea of wages being ‘sticky’. Basically, once wages are raised to a certain level, they rarely drop back down below that point again. It might be due to workplace pressure (no-one wanting to work for a company that mercilessly slashes wages), social pressure (the bad PR cutting wages might earn), or just employers and employees getting conditioned to that wage being the ‘right’ one for that job. Whatever the cause, it’s a real phenomenon. And some believe this would apply to the minimum wage.
In a nutshell, then, the minimum wage might vanish tomorrow and employees at Walmart might still keep earning $7.25 per hour. Not a particularly dramatic result, true, but perhaps the only outcome likely to keep both sides of the debate happy.