We all ask the same question at some point in our lives: why doesn’t the government print off a bunch of money and distribute it to everyone?
This is not a stupid question. In fact, it is a seemingly rational solution to a lot of the world’s problems.
It takes money to buy things. If everyone has money, then everyone can buy things. There would be no more poor people and everyone would be rich. It is the perfect solution to ending poverty.
The problem with this viewpoint is that it omits critical variables. In particular, it ignores the fact that scarcity forms the basis of all economic activity. Printing off more money would not eliminate scarcity.
While most of us learn this as kids, this kind of reasoning has a tendency to reemerge in adulthood. This time however, the question changes to: why don’t we raise the minimum wage to above poverty levels?
While I think it is important to have government measures safeguarding against poverty, I do not think raising the minimum wage is necessarily an effective one.
Using basic economics, one should realize that raising the minimum wage would lower the demand for unskilled workers. There is a point where raising the minimum too much would drastically increase unemployment for unskilled workers.
Employers would simply find ways to get by with less employees. So raising the minimum wage could potentially have the opposite of its intended effect: instead of fighting poverty it would increase it.
Some employers may not be able to get by with less employees. This would put them in the difficult position of either declaring bankruptcy, or hiring sub-minimum wage employees on the black market.
Unless you are a drug dealer, being hired on the black market is not usually a desirable thing. Such employees can miss out on numerous government benefits, such as workers’ compensation, social security, etc.
Also problematic is that black market employees may not be able to list their work experience when applying for non-black market jobs. The longer you are employed on the black market, the harder it is to get out of the situation.
This is the same situation many illegal immigrants find themselves in.
I am not trying to sound pessimistic, because there are some effective ways of fighting poverty.
Our progressive income tax system is probably one of the greatest anti-poverty measures ever introduced.
For those of you who do not do your taxes yet, those with lower incomes are charged a lower income tax rate. For now I am ignoring the fact that the super-rich have found loopholes that allow them to pay less taxes than everyone else.
Basically, any government provided benefit is a way of combatting poverty without suffering the deleterious effects of raising the minimum wage. Such benefits include: housing assistance, tuition waivers, healthcare, unemployment and food stamps-among many others.
I am not opposed to the idea of government provided benefits. In fact I think they are a normal part of any functioning economy.
I do think it is important to have a minimum wage. Just understand that it has its limitations, and in many instances there are more effective ways of combatting poverty.