Dolapo Oshin

Research Paper

Professor Joshua Preiss

19 November 2016

The Stagnant Federal Minimum Wage

This research, which is analyzing why and to what extent the United States government

is unresponsive to the increase of the Federal minimum wage, will highlight several different

reasons as to what influences this outcome. The philosophical writings from respected

individuals such as Adam Smith and Phillip Petit will be addressed. Their individual take on the

true function of a free market as well as the dynamic between employer and employees will be

analyzed seeing that it molds the outlook on the concept of minimum wage. The famous praise

of the American Dream is discussed to determine its credibility in todays economy. Finally,

there is research conducted by would famous economist that have produced different

outcomes. These discrepancies in turn ultimately become contradictory of other research

within the same field. If we understood how such circumstances truly influence the economy

and society as a whole, we would better understand why action is paramount in ensuring that

people get fairly compensated for their hard work.

One of the most important aspects to focus on within a state is the virtues and

ideologies that are taken importantly. The United States has historically been a strong advocate

for a market economy due to one influential individual popularly deemed as the father of

economics; this person happens to be economist and philosopher: Adam Smith. Smiths iconic

notion of the invisible hand was highlighted in his widely popular book The Wealth of Nations.

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Though Adam Smith rarely mentions the invisible hand, it has been widely regarded to as the

focal point of Smiths work. Smith strongly emphasized that the free market is led by an

invisible hand and is solely used to promote an end meaning that anything obstructing the

function of the invisible hand is detrimental to the free market (Concise Encyclopedia of

Economics). Many economists as a result have grasped onto this notion as a reason against the

minimum wage.

However, in an essay by Deborah Boucoyannis, the steep inequality in income and

opportunity is addressed. Boucoyannis highlights that if Adam Smiths system were to be fully

implemented, there would be no cause for steep inequalities to arise. The presence of

winner takes all politics alone is one of the instances that Adam Smith deemed as destructive

to the economy. Though many opponent of the federal minimum wage recognize Smith as the

primary economic philosopher, they fail to recognize the fact that Smith vehemently advocated

for the improvement of living standards of the poor (Boucoyannis 17). For example, Adam

Smiths praising of Holland as the most advanced economy of his time solidified his stance on

a fair economy and condemned the accumulation of high profits by the wealthy few. That sort

of moral standpoint is what many adversaries of the minimum wage fail to credit Smith for. His

vision on the market was essentially to reward honest hard work. However, it is clear that in

modern day, regardless of how hard any individual works, if there is no education involved,

their efforts to become financially stable would be rendered useless.

The image below depicts the model that economists against the minimum wage go by.

Essentially, the unemployment labeled section is illustrating the fact that the minimum wage

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is above equilibrium. Equilibrium is the state where the labor supply and the labor demand are

balanced. Opponents of the minimum wage argue that if the minimum wage is increased, that

implies that it is above the standard equilibrium price which results in unemployment.

In addition to that, opponents of the minimum wage argue that setting a minimum

wage itself is regulatory and disrupts the functioning of free markets. Prior to 1992, the popular

perception was that a 10 percent increase in the minimum wage would automatically decrease

employment opportunities by three percent (Regulation). The Minimum Wage Study

Commission had initially concluded that increasing the minimum wage would reduce job

employment opportunities for teenagers in particular (Schmitt). Now, if the federal minimum

wage were to be increased from anything above the current rate of $7.25 per hour, that itself

would cause rampart unemployment within the labor force ultimately resulting in a less

efficient economy. However, the telephone survey of fast food restaurants conducted by David

Card and Alan Krueger proved otherwise. Their conducted research concluded that there was
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no evidence of decreased employment deriving from an increase in minimum wage. The

discrepancy of results within the economic field itself clearly poses as an agent as to why

minimum wage has not increased. Many are unsure of which action to take seeing as though

there are different outcomes stated from the increase of the minimum wage. Since the early

2000s, there has been two distinct sides of research: One focusing on the new minimum wage

research and the other being keen on the fact that increased minimum wage results in a

negative employment rate (Center for Economic and Policy Research). However, it is very

important to consider results put in practice over that of theoretical assumptions.

It is very important to realize that a perfectly competitive market does not exist. For a

perfect free market to be in place, there must be the following: a large number of buyers and

sellers, no barriers of entry and exit, a market for all goods and services, and no

interdependence amongst peoples utility functions. The fact that there are barriers to entry

and exit in some industries proves to be problematic for critic of the minimum wage. For

example, the automobile industry is primarily dominated by big name, government subsidized

companies who yield a significant amount of power and influence. As explained in an

automotive manufacturing industry analysis One of the greatest barriers to entry in the

automobile industry is the extremely high amount of capital that is required to purchase

physical manufacturing plants, raw materials, as well as to hire and train

employees(Automotive manufacturing industry analysis) . With that being said, threat of new

sellers in the automotive industry is significantly low. The same can be said of the oil and gas

industry. Similar to the motor industry, the oil and gas industry mandates an immense amount

of capital. The costs of pumping trucks, workers specialized in the field, and the competition

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against existing oil and gas corporations are some of the intimations that increases the barrier

of entry. If critics of the minimum wage are to be following a perfectly competitive market, a

model that does not exist in the real world and that is purely theoretical, then the argument

that increased minimum wage causes for increased unemployment is unsound seeing as though

there is no valid proof to support such claims.

The incredible power that corporations hold has a significant effect on the economy. In

the book Capitalism Unleashed, British political economist and author Andrew Glyn provided

a deep and profound analysis of how labor itself has gradually been losing its bargaining power

and the macroeconomic policies that has intensified those pressures within the labor force

internally. This is the case for the union workers at Boeing. In an effort to conserve more

money, Boeing had decided cut the pension program for their unionized workers (Manning).

Rather than aiming any of these cost cut at any of their executives salary, the earnings of the

workers were directly targeted. Taking into consideration that the Boeing Seattle wing is one of

the largest economic stimulants in the Northwest, Boeing executives had used that to their

advantage with a threat to move its wing out of the Northwest region. Essentially, unless

Boeing machinists had accepted the cut in pensions as part of the companys effort to conserve

capital, they would be unemployed because the wing would be moved. Furthermore, Boeings

demand for increased tax breaks in order to remain in the hosting city proved to further

infuriate lawmakers as Legislator, Bob Hasegawa, stated "Tax breaks and lowering wages can't

be the cornerstone of our economic development policy," (Manning). This situation itself

illustrates the extent to which corporation possess an incredulous amount of bargaining power

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over those in the labor sector. In addition, the threat of companies relocating their businesses

oversees to cut costs of production and tax rates are becoming increasingly popular.

In Phillip Pettits article Taking back the economy: the market as a Res Publica, Pettit

essentially articulates the fundamental principles that are present in the economy. He

highlights that being a liber requires equal status under the public order and equally in

control of that order (Pettit). Pettit further explains how the fundamental differences between

the republican conceptualization of freedom conflicts with the libertarians. He makes it clear

that libertarians believe rules of public order regulate the private sphere rather than serving

and that this gaping difference that illustrates the different expectations of the economy and its

relation to the state. Pettits theory also stresses the point of domination. The question remains

if an increased minimum wage furthers or hinders freedom in terms of domination. In terms of

furthering freedom, an employee can become less beholden on their employer if complimented

with provision that make unemployment less of a threat. Unemployment insurance and

minimum income exemplify the sort of social programs. When analyzing how an employees

freedom can be hindered by the increase of minimum wage, unemployment can cause for

desperation for a job which can result in domination by employers. The increasing notion that

corporations have more or less the rights of natural persons is primarily one of the basis as to

why many political figures are hesitant in initiating any law or policy that directly imposes upon

the monetary aspect of a corporation. Because large corporations have a heavy input in

political affairs, this in itself reduces the change of political figures rebelling against

corporations desires; even at the expense of tax paying citizens.

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 Outsourcing too has been cited as a significant reason to why the Federal minimum

wage has been effectively stagnant. With the rapid rise of a tightly weave global economy,

many companies and corporations are seeking to maximize their profits by taking advantage of

less developed economies. Outsourcing is defined as a method used to to procure (as some

goods or services needed by a business or organization) under contract with an outside

supplier (Merriam-Webster). In a research conducted by Forrester Research in 2003, it was

estimated that by the conclusion of 2015, over three million white collar jobs were potentially

at risk of being outsourced and suggested that 11% of US jobs are potentially at risk of being

off-shored (Zhang 776). Essentially, the outsourcing of jobs easily undercuts bargaining power.

This research however is not clear on if the jobs outsourced are going to be out of the U.S

economy or if the individuals holding the jobs are simply just being relocated elsewhere out of

the country. The lack of information provided on this is a huge illustration of an incomplete

research that solely makes rash claims. If this research does not provide who will be benefitted

and who is at loss from outsourcing, its content is essentially discredited and weak. However,

that is not to say that outsourcing is not a business move that is being practiced more often by

companies. The major concern here finding out to what extent is unemployment affected by

outsourcing. Businesses that outsource can still retain their employees; however, they are just

based in a different location.

The term that has been widely associated with the minimum wage is the inflation rate.

The definition of inflation according to Arthur Macewan is the general rise in prices

(Macewan). However, it also highlighted that it is not always the case that the price of a good

rises overtime; sometimes it falls. The fact is: the purchasing power of the dollars has reduced

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primarily because of inflation. To further explain, the U.S dollar can buy less of goods today

than previously. The major problem is that the cost of loving is not supported by earned wages.

While opponents of an increased minimum wage argue that small businesses would suffer

major losses in revenue by an increase in minimum wage, a 2015 survey had refuted that

conceptualization. A majority of small business owners actually support a gradual increase in

wages citing that it would immediately put more money in the pocket of low-wage workers

who will then spend the money on things like housing, food, and gas. This boost in demand for

goods and services will help stimulate the economy and help create opportunities (U.S

Department of Labor). Furthermore, this account is not only supported by most business

owners but is also accepted by more than 600 economists; seven of those which are Nobel

Prize winners. All in all, if an increase on minimum wage is being supported and advocated by

those who opponent claim would supposedly be hurt by it, then why is legislative action not

being taken?

The American Dream is a principle which many immigrants are familiar with and use as

motivation to better their socioeconomic circumstances. The ideology is simple: if any

individual works hard and is consistent, then their circumstance, weather financial or social, will

change for the better. The story of the steel tycoon, Andrew Carnegie, has always been a

primary example used when referring to the American dream. Carnegie, a poor Scottish

immigrant moved to the United States alongside his family 1848. During that time period,

Carnegie held multiple job occupations which he invested his earned money in to further

accumulate his wealth. Carnegie had no college education or degree but still made enough

income to have some funds to invest. However, that is almost not always the case anymore.

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With the purchasing power of the United States current minimum wage alongside the current

cost of living, it is increasingly difficult for individuals to obtain any extra funds outside of their

necessary living expenses. Take this into consideration:

Monthly rent for a single bedroom apartment ~ $700 - $800

Cell phone bill ~ $100 - $150

Car insurance ~ $50 - $100

Electricity ~ $30 - $50

Miscellaneous (internet, cable etc.) ~ $60 - $150

Monthly minimum wage income without tax excluded (7.25 x 40) = 290; 290 x 4 =

$1,160

When taking all these expenses and then subtracting it by the total earned income deriving

from working full time with a minimum wage, it is very clear that the income earned is not

consistent with the expenses that are required to live comfortably. A monthly wage of $1,160 is

not sufficient for any individual to cover these basic expenses and still simultaneously have any

leftover expenses to say for instance, invest in stocks like Andrew Carnegie. Furthermore, these

calculation and values should be enough to prompt government policy makers to adhere to the

needs of the citizens. Citizens and immigrants who come to the United States of America in

search to pursue the American Dream are instantly faced with circumstances that exploit

their labor rather than compensate them for their commitment and diligence within the

workforce.

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 All in all, the topic of the Federal minimum wage has been a long and very split in

regards to the reasoning behind the stagnation of it. On one end, there are those who oppose

an increase in the federal minimum wage and on the other end, there are those who

vehemently support it. Regardless of what side is being supported, it is very important to

understand the facts behind the criticisms and the mindset of those advocating for it. The

United States of America has a longstanding ideology which has always defended and

promoted a market economy. With that being said, the argument that an increase in the

federal minimum wage automatically results in increased unemployment makes the population

as a whole rather weary. However, Economists have proved otherwise. In a perfectly

competitive market economy, an increase in the Federal minimum wage would result in higher

unemployment. However, it is pivotal to realize that a perfect market economy does not exist

in any market or country in the world because there are barriers of entry and exit into a market.

The motor industry and the oil industry were examples provided earlier that illustrated this

reasoning. Ultimately, it would be unsound to base the opposition of an increased minimum

wage under the pretense of a perfectly competitive market economy. Furthermore, the

telephone survey of fast food restaurant study conducted by economists David Card and Alan

Krueger suggested no evidence of increased unemployment deriving from an increase in the

minimum wage. Large corporations have a heavy hand in the stagnation of an increased Federal

minimum wage. The fact that large companies such as Boeing can threaten workers as well as

policy makers is evident. They threaten to move their companies, call for increased tax breaks,

and their executive are still rewarded while their workers are slowly being exploited. The

influence and power of big name companies is definitely a huge attribute as to why the little

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political action has been taken on the issue of the Federal minimum wage. If companies were to

outsource their employees and their companies, many against the Federal minimum wage feel

as if it would be detrimental to the United States economy. However, they fail to understand

that the research provided lacks specification on if the outsourcing still places the workers in

the U.S economy. Therefore, that discredits and weaken the claim that most American

companies would outsource their companies if the Federal minimum wage were to be

increased therefore resulting in increased unemployment. The inflation rate is something that

should have aided in the increase of minimum wage considering the purchasing power of the

dollar has drastically reduced overtime. For a country build on the idea of opportunity with the

term The American Dream, lack of action taken in protecting the dream that they take so

much pride in is rather ironic. Many individuals working full time on minimum are cyclically

unable to make basic ends meet. If the United States of America is simply becoming a territory

solely focused on numerical values at the expense of the general welfare of its occupants, one

should soon expect a country in which is ruled and dominated by large corporations.

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 Works cited

Boucoyannis, Deborah. "The Equalizing Hand: Why Adam Smith Thought the Market Should
Produce Wealth Without Steep Inequality." Perspectives on Politics. Web. 05 May 2016.

Pettit, Phillip. "Taking Back the Economy: The Market as a Res Publica." OpenDemocracy. 31
Jan. 2013. Web. 05 May 2016.

Van Doren, Peter. "Minimum Wage." Regulation 38.3 (2015): 56-57. Web. 10 Nov. 2015.

Macewan, Arthur. "The Minimum Wage and Inflation." Dollars & Sense July-Aug. 2014: 30.

Web. 11 Nov. 2015.

Wills, Jane. "The Living Wage." Soundings 42 (2009): 33-46, 157. Web. 11 Nov. 2015.

Schmitt, John. Why Does The Minimum Wage Have No Discernible Effect on Employment?.

Washington, D.C. Center for Economic and Policy Research. Web. 11 Nov. 2015.

n.p. Mimimum Wage Mythbusters. United States Department of Labor. n.d. Web. 18

November 2015.

Manning, Jeff. Boeing Gets What It Wants In Nasty Contract Dispute With Machinists. The

Oregonian. Oregon Live, 3 January 2014. Web. 18 November 2015.

n.p. Automotive Manufacturing Industry Analysis. n.d. Web. 18 November2015.

n.p. Adam Smith. The Concise Encyclopedia of Economics. Library of Economics and Liberty,

2008. Web. 18 November 2015.

Zhang, Ting. International Outsourcing and Unemployment in a Minimum-wage Economy.

Review of International Economics. 19.4 (2011): 776-786. Web. 10 December. 2015.

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Merriam-Webster. An Encyclopdia Britannica Company. Web. 10 December. 2015

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