Kirk Johannesen, The Republic
johannesen@therepublic.com
Third of a four-part series
Economists agree that the purpose of a minimum wage is to provide a social safety net.
However, they disagree on how a minimum wage should be determined and if it can deliver the intended benefit.
Phil Powell, faculty chairman of the evening MBA program at the IU Kelley School of Business, believes the free market is the best way to decide wages.
That thinking is Darwinian in nature, he said, and involves winners and losers. Governments cannot rely on that because of a need for a social safety net to help lowincome workers and to provide economic stability.
Powell said the federal minimum wage helped those it was intended to help when it was created in 1938.
Many people were not highly educated and performed manual labor, so the minimum wage ensured that they received a living wage.
As people became more educated, reliance on unskilled workers diminished, and they found jobs that paid higher wages because there was a need for those workers.
Powell said there always is a need to help unskilled workers and the very poor, though.
"It provides a floor for productive citizens who are working to provide a living for themselves and families," said Charles Davis, professor of labor studies for Indiana University's Division of Labor Studies at IUPUI.
Debating a raise
Powell said mandating higher wages is an incentive for businesses to hire fewer people, causing unemployment to increase.
"It's a question of having more working at a lower wage or fewer at a higher wage," Powell said.
He said raising the wage will not benefit the people it is intended to benefit. About 80 percent of people on minimum wage are teenagers or young workers without families.
"Increasing the minimum wage means more pocket money for teenagers," Powell said.
Powell said raising the minimum wage also gives companies the incentive to hire illegal immigrants at a wage below the minimum wage.
However, Davis said regardless of what a business sells, it requires a certain amount of employees to function successfully.
Goods are sensitive to the market because of competition and supply and demand, so businesses cannot always pass increasing labor costs to consumers.
Businesses can offset higher labor costs through more efficiency and productivity, which can be achieved by introducing new technology, changing the way work is organized and making changes in schedules, Davis said.
Higher minimum wages in other states have not produced job losses, said Liana Fox, an economist with the Economic Policy Institute, a progressive think tank in Washington, D.C.
If higher minimum wages caused unemployment, hundreds of thousands of jobs would have been lost due to the majority of states paying minimum wages above the federal level.
But that has not happened, she said in her paper, "Minimum Wage Trends."
Alternatives?
While higher minimum wages help workers, some economists propose other ways to provide a social safety net without a minimum wage:
An earned income tax credit is a reimbursement by