Anyone who has taken economics knows what happens when you try to enforce a price above or below the equilibrium price. Setting a price above the equilibrium price causes surplusses. Suppliers want to produce more than consumers want to consume at that given price. The same logic applies to employment. Setting an enforced wage above the equilibrium wage causes surplusses of human labor (aka unemployment). Usually, when an economic system is at a point other than it’s equlibrium, there is economic inefficiency in the market. So what’s wrong with letting the market determine the wage rate? Why do we need a minimum wage? Well, the problem is that if the market sets the wage rate for all employees, many employees will earn wages that will not provide a reasonable standard of living. Having a large population with below a living wage is “bad” in an ethical sense, but also carries some negative externalities. So it is obviously a completely reasonable economic goal to increase the minimum wage that the employees are paid. But by setting a mandatory minimum wage, you create unemployment, and therefore you have economic inefficiency. If the workers who are out of a job were working, GDP would increase.

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So we really have two goals here. The first is obvious: provide a “living wage” to as many workers as possible. The second is less obvious: maximize GDP. So to maximize GDP, it’s necessary to allow the market to set the wage of workers. However, by doing this we fail to achieve the first goal. It would be good if we could satisfy the goal of providing a living wage to all workers through means other than by enforcing a minimum wage. One method that has been proposed (originally by Milton Friedman) is the idea of a negative income tax (NIT). The idea of having an NIT is very attractive from an economic perspective. In theory, it can ensure both the first and second goals: maximize GDP and ensure a living wage to as many workers as possible. In practice, it reduces motivation to work, thereby increasing economic inefficiency.

Consider this from a different perspective: whenever you garauntee a living wage to everyone, you eliminate the economic incentive to work. So you can’t simply garauntee a living wage to everyone. It goes back to the age old adage: “You don’t work, you don’t eat”. This seems harsh, but the reality of the matter is that life is harsh. Obviously, there needs to be exceptions to this rule: not everyone has the capability to work, and it is a laudible goal for society to provide for these people. This is easier said than done.

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So we refine our goal: now let us garauntee that all people that can work and are working are recieving a living wage. Break this goal down into it’s three parts. “All people that can work” is extremely difficult to define. The extremes are easily defined: a wheelchair-bound, senile, elderly woman can obviously not work. A young, healthy, 21-year old male obviously can work. Everything in the middle, however, is impossible to define. “All people that are working” is also extremely subjective. Is a 14 year old with a paper route working? How about a 23 year old guy, living in his parents basement, working a part time job? What about a single mother, working as much as she can while taking care of her children? There are no easy answers here. Finally, how does one define “a living wage”? This is completely subjective. What is the living wage for that 23 year old guy? What’s the living wage for that single mom? Does the concept of a living wage even apply to the 14 year old? What about the elderly woman with no dependants? How should you even define a dependant for the purpose of a living wage? And on top of all three of these elements, how do you formulate this system so that it does not reduce the incentive to work?

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I started writing this blog article thinking that I’d present an economic perspective as a solution, but I think I discovered the opposite. Some economic solutions are better than others, but I find it unlikely that a purely economic solution will be able to address an extremely complex and subjective human problem.