Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market. This follows from basic micro-economic theory and here is nice short video of Milton Friedman, the renowned United States economist arguing against minimum wage laws. To offset this problem, it is essential to have some kind of social security safety net for the unemployed.
Instead, I would like to propose the following scheme which seems to me as more efficient (please let me know in the comments if you know of any country that tried this or something close): Set x= 1.5 * min_wage. Have no minimum wage laws. And folks who earn y which is below x, receive (x-y)/2 in social security. This way, we have (1) lower “skilled” people contributing to the country’s GDP in their own small way instead of being unemployed and contributing nothing. If we have a significant number of these guys, the numbers could really add up. (2) The min wage like concerns are taken care of with the government safety net. (3) There is still incentive for people earning below x to work. If we set the social security to something like (x-y), no one earning below x will have any incentive to work since their net in hand compensation would then always be x regardless of what they do.
This above scheme looks almost like a pareto improvement to me compared to minimum wage laws, supported by social security for the unemployed, because it does roughly as good with regard to supporting those whose skills are below the minimum wage, while ensuring less government spending on social security, since many of the formerly unemployed would now be in low wage jobs and the government simply has to top up their current salaries which might be well above zero. This is of course a good thing, because the government then has the option of either using the extra money to reduce the budget deficit and ensure better economic health of the country, or use the money for other worthy endeavors. There is also greater contribution to the country’s GDP which is a good objective in itself. Lastly there is reason to believe that people being gainfully employed is better for their physical and mental well being. It will also likely reduce their propensity to indulge in anti-social activities, compared to a scenario where they are unemployed with a lot of idle time on their hands.
I haven’t spent much time thinking through the implementation and whether there is greater potential for such a scheme to get scammed and exploited etc. At least at first glance it seems to me that this scheme is no more exploitable compared to welfare benefits for the unemployed, which must necessarily go with minimum wages for it to actually be humane and better for the poor. Some people can probably get away by earning a living and still claiming to be unemployed and collecting welfare checks under the min wage + unemployment welfare method. The same people can do it under the new proposed scheme as well, so I am unable to see any more vulnerabilities and loopholes in this system compared to the previous one.
A potentially great improvement to minimum wage laws to handle both economic efficiency as well as poverty concerns
Minimum wage has the side effect of leaving unemployed, the people who do not possess the requisite skill to command the minimum wage in the market. This follows from basic micro-economic theory and here is nice short video of Milton Friedman, the renowned United States economist arguing against minimum wage laws. To offset this problem, it is essential to have some kind of social security safety net for the unemployed.
Instead, I would like to propose the following scheme which seems to me as more efficient (please let me know in the comments if you know of any country that tried this or something close): Set x= 1.5 * min_wage. Have no minimum wage laws. And folks who earn y which is below x, receive (x-y)/2 in social security. This way, we have (1) lower “skilled” people contributing to the country’s GDP in their own small way instead of being unemployed and contributing nothing. If we have a significant number of these guys, the numbers could really add up. (2) The min wage like concerns are taken care of with the government safety net. (3) There is still incentive for people earning below x to work. If we set the social security to something like (x-y), no one earning below x will have any incentive to work since their net in hand compensation would then always be x regardless of what they do.
This above scheme looks almost like a pareto improvement to me compared to minimum wage laws, supported by social security for the unemployed, because it does roughly as good with regard to supporting those whose skills are below the minimum wage, while ensuring less government spending on social security, since many of the formerly unemployed would now be in low wage jobs and the government simply has to top up their current salaries which might be well above zero. This is of course a good thing, because the government then has the option of either using the extra money to reduce the budget deficit and ensure better economic health of the country, or use the money for other worthy endeavors. There is also greater contribution to the country’s GDP which is a good objective in itself. Lastly there is reason to believe that people being gainfully employed is better for their physical and mental well being. It will also likely reduce their propensity to indulge in anti-social activities, compared to a scenario where they are unemployed with a lot of idle time on their hands.
I haven’t spent much time thinking through the implementation and whether there is greater potential for such a scheme to get scammed and exploited etc. At least at first glance it seems to me that this scheme is no more exploitable compared to welfare benefits for the unemployed, which must necessarily go with minimum wages for it to actually be humane and better for the poor. Some people can probably get away by earning a living and still claiming to be unemployed and collecting welfare checks under the min wage + unemployment welfare method. The same people can do it under the new proposed scheme as well, so I am unable to see any more vulnerabilities and loopholes in this system compared to the previous one.
Thoughts?