Understanding Why Firms Hire: Minimum Wage Debate

Highly profitable companies pay some of their workers only the minimum wage. Some politicians and activists, along with the President, want to raise this wage. Arguing that it is unfair for workers to make so little, the President wants to raise the minimum wage for all workers to $10.10. Unfortunately, the President doesn’t understand how hiring decisions work. Companies don’t hire workers as a form of charity; they hire workers because they think those individuals will provide a service whose value exceeds the wage they are willing to accept.

Employers won’t hire a worker at a wage above the worker’s productivity. If a worker with a given skill set can provide a service worth $10 per hour, companies won’t pay him more than $10 in wages and benefits. To do so would be to lose money. You wouldn’t pay someone ten dollars to help you make five, would you?

If the price of low-skilled labor is artificially raised by politicians, then unless productivity increases, employers must compensate for those increased cost in some way. They may cut benefits, lay off workers, or reduce hiring. Shifts may be shorter, and hours may be cut.

Could a worker produce $100 but only get paid $10? Seems unlikely. More productive workers have more alternatives. More alternatives means more bargaining power. We don’t hear about accountants, nurses, or electricians making the minimum wage. That’s because people in those professions provide more value than the minimum wage. An accountant, nurse, or electrician would laugh at any employer trying to hire them for the minimum wage. Those professionals would simply move to the next employer.

If minimum wage earners could earn more money elsewhere, they would. Earning the minimum wage means they couldn’t find a higher paying job. These workers want more money (don’t we all?) but can’t find someone willing to pay them more. The unskilled can’t keep moving when offered a low paying job. They don’t have any other offers.

This is because the value they add does not provide more than the minimum wage’s value. If they had the skills to provide companies with $10 an hour of value, they could search around until they found a company offering that. They can’t find a better offer because they don’t have the skills.

Why aren’t these workers more productive? Forty-four percent of Americans earning the minimum wage are in food-preparation and serving-related occupations. Minimum wage earners tend to be young as well— 24% are teenagers (ages 16 to 19) and 50.6% are ages 16 to 24. These workers aren’t yet productive in part because they haven’t yet acquired basic job skills.

What these young and low-skilled workers need is not a higher barrier to their first job and experience. Barriers need to be lowered. Workers need a chance to gain skills that make them useful to employers. They need better education and better work experience.

Simply working is another way besides additional education or training to become more productive. Workers can learn and demonstrate to employers skills such as self-discipline, timeliness, professional behavior, and customer service. By working, people learn how companies actually make money. The worker who figures out how to please customers will be the worker who has also pleased her boss. She then finds it easier to advance within the company, or to find another job somewhere else that pays better.

Using the Arkansas unemployment rate of 7.4%, 98,500 Arkansans were unemployed. That’s not counting discouraged workers who want to work but have given up looking for work. The Arkansas unemployment rate adjusting for those workers is 8.4%. If we add workers who are forced to work part time but wish to work full time, the unemployment rate in Arkansas is 13.7%. That’s a tremendous number of Arkansans who aren’t working. These workers need a paycheck and the chance to build skills.

Behind a higher minimum wage is a good intention, filled with the hope of helping people. Good intentions, however, are not the same as good policy. A better plan for Arkansas would be to reduce barriers to work and to improve our schools. For Arkansans who have valuable skills the minimum wage is irrelevant. If we want to help low-skilled workers, we need to implement reforms that make sure more Arkansans can improve their skills and move into that category.