Reducing Unemployment – The Problem with the Minimum Wage

Jun 25, 2010 by

The minimum wage in the United States is $7.25 per hour as of 2010. At that rate, a person working 2,000 hours per year (50 weeks of 40 hours) would have an annual income of $14,500. Employers must pay a number of additional taxes for workers. While workers must pay 6.2% of their income for Social Security, employers must pay 6.2% of the workers’ income as well. The same system exists for Medicare, in which both employer and employee must pay 1.45% of the earnings. So, the actual cost of a minimum wage worker to an employer is (14,500*(1+.062+.0145)) = $15,609.25.

While $15,609.25 might not seem like a lot of money, it is actually quite a ton when compared to wages in other countries. In Beijing, per capita income is only around $10,000. Per capita income in Mumbai is only about $2,700. In the more remote Chinese city of Chongqing, per capita GDP is about a third of what it is in Beijing ($3,300). The American minimum wage is far higher then the average wage paid to many people.

The minimum wage was created to protect workers from exploitation. It may have lived past its purpose. At present 10% of the nation is unemployed and actively seeking a job. Even more may have given up the search. It is impossible for American workers to compete with workers from many other countries given that our minimum wage is higher than their average wage. Exportable products are sold on a global marketplace. The minimum wage made more sense when all businesses selling products on a market had to face the same wages and production costs. Now that the competition for manufacturing is global, the minimum wage is actually causing harm. It is preventing companies in the U.S. from creating jobs that are able to produce products that can be sold competitively on the global market. this would be fine if everyone had a job. Given the high rate of unemployment, unemployed Americans would be better off with competitive but lower wage jobs. Until unemployment drops to normal levels, I feel that the minimum wage should be repealed.

6 Comments

  1. Guest

    Um, you don't think that hiring a bunch of illegal immigrants willing to work way below the minimum wage has anything to do with unemployment? In a sense the minimum wage has already been repealed.

  2. Adam

    Well, even if illegal labor is available, it is preferable to be able to legally hire people at these prices. The government would then be able to collect taxes on them, albeit minimal.

    I actually feel we should try to legalize most of the “illegals”, but that is another story…

  3. Qwester

    Right on, Adam! Why is it so difficult for this to be understood. Our minimum wage is a magnet for illegal immigrants and unmotivated employees many of who are from the racial minorities with their own cultural handicaps. Motivated employees rapidly climb the pay ladder except in union jobs which penalize perfprmance beyond the agreed rate. Fools can be exploited endlessly.

  4. mart

    I think the problem with your idea is you fail to consider the difference in the living cost between people in rural China and those who live in USA. Minimum wage should not be taken off; but instead encouraging the people without jobs to look for jobs outside United States should be considered. Furthermore, I believe this is more of a short term global problem due to the resistance of some countries to inflate their currencies.. since these countries have a higher development rate than developed countries, such as USA, they will not be able to keep the minimum wage that low also

  5. Morelandac

    In order for these people to live (making 15,000) they rely on government subsidies. Is there a way to eliminate the middle man and pay people a living wage, or at least a more dignified wage? Despite the howls of the rich and their apologists, tax studies indicate that we have close to a flat tax now when real tax rates are considered and all taxes, including state and local, are included. Corpotate tax policy is a bad joke. I asked Arthur Brooks of AEI about eliminating the corporate tax in exchange for increasing the minimum wage but he said that hits the poorest (i.e. young blacks) the hardest. Could it really be any worse? What 3 dollars any hour at McDonalds? Tax policy is already deciding the winners and losers in this society. But with tax rate so low, there is little incentive for rich people to invest in companies. Finance is too attractive and capital gains are historically low. I don't believe what is best for U.S international corporations and U.S. rich people is best for the country as a whole. When the dollar loses its reserve currency status we will be doubly screwed. While the rich will be protected by overseas investments the average American will lose buying power and probably whatever meager investments they have. That is why I am here to offer you special mint gold bullion coins-just kidding.

  6. Morelandac

    OK, you legalize one wave. What about the next wave? Surveys in Latin American countries show that more than half and up to 80% of people would leave if they could.

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