While politicians continue to debate what role the state should play in the alleviation of poverty, there is little doubt regarding whether or not the reduction of poverty would be within a state’s best interest; it certainly is. Morality aside, widespread poverty is detrimental to a state’s functioning. Even at a practical level, studies link high poverty rates to a host of negative outcomes, from increased crime rates to stunted cognitive development in children born to poor families. From an economic perspective, poverty represents a significant financial burden to society, as it both requires disproportionate economic resources to attend to and reduces the economic contributions to society of those afflicted by it.
However, even when there is agreement regarding the need to reduce poverty, there is far less regarding the optimal methods of doing so. For example, most members of the global community accept the concept of a state-enforced minimum hourly wage as a way to mitigate poverty. However, what amount constitutes the ideal minimum wage remains a contentious political issue in many countries. For example, consider newly-elected US President Joe Biden’s announcement of his intention to more than double the current federal minimum wage from 7.25 dollars an hour to 15 dollars an hour. The move represents a significant component of the impending COVID-19 stimulus package designed to reinvigorate the American economy, but it has drawn substantial criticism from his opposition.
The move has been years in the making for numerous advocacy groups, organizations, and activists, who have championed raising the minimum wage as a measure that would greatly improve the quality of life for both minimum-wage and low-wage workers. Wages, they argue, have failed to keep up with the rising price of goods. Statistics mirror these organizations’ concerns, indicating that the relative purchasing power of those making minimum wage has decreased more than 31 per cent since its peak in 1968. As wages fail to keep up with the price of goods, these wages keep workers on poverty’s doorstep. Even those working full-time making the federal minimum wage without any dependents are struggling to stay above what is considered the poverty line by the federal government.
So if the minimum wage is low enough to virtually ensure that those relying on it will be impoverished, even when they are working full-time, why not just raise the minimum wage? While some claim this is an obvious solution, others view it as a measure that in the long run would exacerbate, not alleviate poverty. To understand this argument, it first has to be understood where and how labour derives its value. Under a mostly capitalist system, labour is essentially a commodity, or a good that employers seek from workers. Like commodities, labour’s value is also subject to market forces such as supply and demand.
For example, consider two similar businesses in two different towns, both of which need a secretary. In one town, a single qualified person applies for the position. In the other, 25 qualified people apply. The value of the work of a secretary in the latter case is lower even though their job may be functionally identical. This is because, as for commodities, external factors, such as excess supply of alternatives, depreciates the value of labour.
This is the case for unskilled labour not only in the United States, but in many Western industrialized nations. The rise of automation, the outsourcing of jobs overseas, and the transition from a production-based to a service-based economy have all led to a decrease in the demand for, and thereby the value of, unskilled labour. Changing the minimum wage cannot change this reality, nor can it change the actual value of low-skilled labour. As such, some economists argue that if the price of labour is raised above what it is actually worth, the same thing happens when the price of a good is raised above what it is worth; fewer people buy it.
Indeed, a major study by the Congressional Budget Office found that raising the minimum to the proposed 15 dollars an hour would increase the wages of an estimated 27 million Americans, but would also cost the jobs of an estimated 1.3 million workers. For context, only 1.8 million workers currently make the same or less as the federal minimum wage.
Predictably, those who are estimated to be worst affected are those whose labour is of the lowest value: the least skilled workers, such as students or those who were unable to attain their high school diploma. This same effect was observed when Ontario increased its minimum wage to 14 dollars an hour from 11.40 dollars an hour, as student jobs decreased by 4.5 per cent in the year following the increase.
Indeed, this is because increasing the minimum wage does not address the underlying problem of the devaluation of low-skill labour. Policies that do address this are certainly possible, but they require us to move beyond the minimum wage debate towards a total renegotiation of the relationship between working people and the state. Countries that have done this, such as the Nordic countries, have not only been able to achieve a better average wage for its unskilled workers, but have done so without actually having a minimum wage. In turn, these changes have also contributed to a better quality of life for those workers, including lower unemployment.
Such policies would include a significant transformation of our model of the welfare state away from one that is limited and weak, to one that emphasizes a high universal standard of unemployment security. Workers of low socio-economic status need to have bargaining power in order to negotiate better wages, which cannot reasonably be accomplished if unemployment is synonymous with destitution and the deprivation of essential human needs.
For now, barriers to the attainment of market-valued skills could be radically lowered through government subsidization, allowing those who may not have the means or the capability to go to university to instead pursue an affordable direct-to-work education in domains such as trades. This may increase the earning power of the individuals who previously would not have been able to afford trade school tuition. In Canada, such tuition can often be as expensive as university tuition.
Policies like these could equip those who otherwise may remain as low-skilled workers to better allocate their skills within the economy, while also increasing the value of low-skilled labour by reducing its supply. Disadvantages to raising the minimum wage, such as increases in unemployment and decreased opportunities for the most vulnerable workers, could also be circumvented. There may be more than one strategy to raise both the average wage for low-skill workers and their quality of life, but they each require that we move beyond the minimum wage debate into more ambitious territory.
Edited by Jane Warren
The opinions expressed in this article are solely those of the author and they do not reflect the position of the McGill Journal of Political Studies or the Political Science Students’ Association.