« Rag Doll Physics | Main | In this morning's inbox... »

Tuesday, August 01, 2006


So, what's your response to the following statement:

"Minimum wage serves only to increase unemployment by forcing employers, where minimum wage is offered, to choose between ten employees at a fair wage (relative to the value they contribute) or nine employees at minimum wage (assuming that the value they provide the employer is less than the minimum wage in place), leaving nine people earning slightly more, but one person earning nothing."

In other words, if you had a choice, would you work for $5/hour or $0/hour if you were the one out of ten?

Ah, well the point of the original post was simply to highlight that the Democrats are trying to use the minimum wage as a wedge issue this year, taking a page from the Republican play book. So I didn't think my own opinion about the minimum wage was necessarily relevant in that context.

However, since you asked... ;-)

I happen to oppose raising the minimum wage, and I certainly oppose the idea that some people express that a minimum wage is the bare minimum that must come out of the employer's pocket, rather than a minimum income for the employee (see, for example, the fuss on BlueOregon over tip credits).

So yes, I understand and agree with your statement above. The minimum wage is an artificial price level for labor. And artificial price levels corrupt the market and thus make the market less efficient.

Setting the price of anything higher than its actual value will tend to reduce demand/cause excess (wasted) supply; witness wages too high causing unemployment. And setting the price lower than actual value will tend to reduce supply/cause excess (unsatisfied) demand; witness wages too low causing unfilled jobs in the market. I'm stating the obvious here, I know, since you clearly understand this already. But, you know, for those playing at home... ;-)

Now, I also understand that for some people, efficiency of the labor market is not their primary goal (nor perhaps a goal at all). So the above argument about artificial price supports isn't going to sway such people.

What I find particularly disingenuous, however, is the aforementioned resistance to tip credits. Disallowing tip credit is a corruption, I believe, of the very concept of a "minimum wage", which I understand to be a guarantee that the fruits of a worker's labor will meet some minimal standard of value.

In other words, it is (and ought to be) a minimum income guarantee, if we are to have a minimum wage at all. It is supposed to be a worker protection.

But to so many on the anti-business left, they see it as less of protection for workers and more as a punishment of sorts for employers. It is considered to be the minimum amount that must be extracted from the business and given to the employee, independent of that employee's actual income. Clearly, then, the minimum wage has nothing to do with the worker per se, and everything to do with requiring a certain level of payroll expenditures from the business.

Sadly, in Oregon, the law is on their side. As written now, the minimum wage is far more anti-business than it is pro-worker. It happens to benefit workers, no question (at least, those who are lucky enough to be workers, as you pointed out). But that is clearly not the point of the minimum wage in Oregon.

But the minimum wage doesn't benefit all workers equally, alas.

Tip credits, of course, fit into the (correct) view of minimum wage as an income guarantee for the worker, rather than an expense guarantee for the business. If the minimum wage of $7.50 is an income guarantee, then an employee who is paid $5.50/hour and receives tips of $2.00/hour is satisfying the guaranteed benefit of $7.50/hour. Likewise, if an employee only receives tips of $1.00/hour then the employer must make up the difference of $6.50/hour so that the employee still receives the minimum $7.50.

Without tip credits, of course, there are two minimum wages depending on the type of work you do. In Oregon and (apparently) 6 other states, it is the case that non-tipped employees are blatantly discriminated against by state law, yet this apparently does not bother the "pro-worker" folks in the slightest. In fact, the mere suggestion that this inequity be addressed will result in the most violent reaction.

For example, wait staff who average at least $2.00/hour in tips can not possibly, under Oregon law, earn less than $9.50/hour. Yet gas station attendants, who are rarely if ever tipped, may under Oregon law earn only $7.50/hour. Tipped employees enjoy greater protection under the law than non-tipped employees. And the degree of protection varies in direct proportion to the tip income a worker receives, so essentially there are an unlimited number of minimum wages, depending entirely on who you are and where you work.

Those who oppose tip credits complain that it would hurt low-paid workers. And, they are right. I don't blame them for not liking the idea.

But for any unfair law on the books there's somebody taking advantage of it who would be hurt if the law was changed. Which is more important, having a legal system that makes sense, or continuing unjust special treatment for those who are fortunate enough to benefit from a screwed-up system?

Doh! You went and got me started... :-D


Fantastic response. Very well thought-out, and very insightful. You're exactly right about identifying the two theories of minimum wage. I had never thought of it quite like that.

Here's a thought on the server (tipping) issue. What's most productive and fair (meaning most likely to encourage people to work hard)? I don't like the tipped minimum wage being the full $7.25 - the system we have in Oregon. I don't like the float-down wage description, either, but only because it creates a "dead zone" in wage levels. I prefer the usual approach of paying someone a reduced minimum wage and not counting tips. That creates the best incentive program for workers, because at $7.25 an hour, even with no tips at all, you make what the kid at Target makes. Not bad for entry-level, but something you'll want to move up out of. If you're nice to people, you get not only the full base guarantee, but your tips are all yours, too. Best of all worlds for the worker. But the marginal return on making the effort to serve better was 7:1 for the first dollar an hour you earned. If you're a little on the lazy side, you might be nice if its easy for you, you won't try too hard. It only raises your pay by 14% more than the minimum for every dollar an hour you earn in tips. Maybe not worth the effort. But make the minimum for servers 3%, and now each busk you earns get you 33% more than the minimum and now you're more likely to go to the effort to earn that extra dollar an hour because being that $1/hour more cheerful, you get a good return on that minimal effort (33%!)

The float down is the worst, because now someone who's bad enough to get $0 in tips gets the same as someone who earned $7.50 an hour in tips. You've got to earn $7.51 in tips before even getting any benefit as opposed to being snitty enough to earn zero in tips. Who would bother to go the extra mile? It's not worth it when Jackass over here can treat his customers like crap and get the same result.

Float-down is the worst for the employer and for employee motivation. I say pay 'em $3/hr and let 'em keep their tips. It's fair for the employer, who's giving a good job (even at $3/hr base), and it's fair for the employee who has an incentive to do a great job and make great money.

There are many ways to work the tip credit idea. I know in some states, employers are only allowed credit for 50% of the employee's tips, down to half the minimum wage.

This is a compromise plan, because it takes some tip credit, leaves some of the variability of the minimum wage, and still provides the service incentive benefit to the customer for leaving the tip.

In the above example, where a waiter earns $2/hr in tips, the employer would only get $1/hour in credit, thus would still have to pay $6.50/hr. The waiter then still has an incentive to provide better service and get a better tip, and the employer gets some credit for providing the employee an opportunity to make that extra money. It's a step in the right direction, but only partially mitigates the unequal protection complaint (which effectively means, it does not truly mitigate it at all) since a worker who earns any tips at all will have a higher minimum wage than non-tipped workers.

But hey, I'm all for incremental compromises that move in the right direction, I don't require a perfect solution all at once. ;-)

The comments to this entry are closed.

October 2010

Sun Mon Tue Wed Thu Fri Sat
          1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30


Like This?

Tips Welcome!

Tip Jar