Does Keeping the Minimum Wage Low Just Encourage People to Stay on Government Assistance?
The notion that maintaining the minimum wage at a low level encourages individuals to rely on government assistance is a contentious one. While some argue that the welfare cliff is primarily responsible for this phenomenon, evidence suggests that the relationship between the minimum wage and government assistance is more nuanced. Instead, the core issue lies in the customer-driven dynamics of business operations, where employers prefer hiring high-skilled, high-value employees over low-skilled workers due to higher profit margins.
Customers Determine Wages - Not Business Owners
It is imperative to recognize that in the business world, customers set the wage rates, not business owners. Business owners are primarily self-interested and seek to maximize their profits. They achieve this by employing individuals with higher skill levels and greater value in the eyes of their customers.
A concrete example is provided by looking at two major corporations: McDonald's and Facebook. McDonald's typically pays workers an average of $11 per hour with minimal benefits, while generating approximately $3.50 in profit per labor hour. On the other hand, Facebook pays workers around $120 per hour on average with excellent benefits, and generates about $300 in profit per labor hour. It is clear that Facebook pays about 10 times more per hour than McDonald's but generates roughly 85 times as much profit per hour. This stark contrast underscores the preference of businesses to employ high-skill, high-value individuals over low-skill workers whenever possible.
The profitability of employing higher-skilled workers is evident in the fact that McDonald’s would readily increase wages tenfold if those employees could generate an eighty-fivefold increase in profit, given the right skills and value.
The Welfare Cliff and Its Impact on Employment
The welfare cliff, a term used to describe the sharp drop-off in financial assistance when a recipient experiences wage increases, often discourages workers from seeking higher-paying jobs. My business, for instance, employed a significant number of new immigrants with no work experience, who started at or near the minimum wage. Many of them progressed significantly over the years as they acquired new skills and learned the language, allowing them to secure better jobs with our customers.
However, this positive trajectory was disrupted for employees who were already receiving government assistance. They clearly stated that they did not want any raises, overtime, promotions, or bonuses, as they heavily relied on their benefits. One such benefit was a low-income housing subsidy, which, if forfeited due to higher wages, could result in significant financial penalties. Losing the ability to afford this benefit might require relocation or payment of an additional $2,000 to $3,000 per month, thus deterring them from pursuing higher wages.
A Feature, Not a Bug
The welfare cliff is not a mere unintended consequence but a deliberate feature in the current social welfare system. Many reasonable individuals advocate that higher wages should come with only a slight reduction in benefits to incentivize skill development and promotions. However, despite such rational suggestions being proposed by both Democrat and Republican administrations, the welfare cliff persists. This persistence suggests that the issue is not purely an oversight but a strategic choice.
By examining the welfare cliff from a historical and political perspective, it becomes evident that powerful stakeholders prefer its continuation. Years of systemic flaws suggest that government policies are designed to maintain the status quo rather than fix underlying issues. In other words, the welfare cliff is not a bug but a feature in the system, intentionally preserved by those in power.
Understanding this dynamic is crucial for addressing the root causes of reliance on government assistance and for proposing effective interventions. By working together, policymakers, businesses, and community leaders can strive to create a system where employees are incentivized to improve their skills and advance their careers, without fear of losing critical benefits.