You may have heard an argument about minimum wage that goes something like this:
Companies like McDonald’s can only get away with paying people minimum wage because of the existence of food stamps. Without food stamps subsidizing their income, nobody could survive on minimum wage, and McDonald’s would have to pay higher wages. Therefore, tax payers are subsidizing McDonald’s low wages.
Almost everyone, on all sides of the aisle, is against corporate subsidies when properly understood. Therefore, this argument is much more interesting than the standard, “everyone deserves a living wage” argument, because if it were true, it could get support from both the left and the right. Let’s examine it more closely to see if there is anything to the argument.
Economics is the study of choices. A common problem of studying economics is that novice practitioners (and sometimes Nobel Prize winners) don’t see all of the choices available. Frederic Bastiat called it the problem of the seen and the unseen. Henry Hazlitt called it ignoring the basic “one lesson” needed for understanding economics. Thomas Sowell called it one-step-thinking. But, regardless of what you call it, it is a barrier to understanding economics.
A man who takes a minimum wage job has decided that of all the choices available to him, the minimum wage job was the most beneficial to him. This is proved by his actions. If he decided it was not his best option, then he would not take the job.
It’s easy to think that someone working minimum wage has no other choice except to work minimum wage, but to think like an economist, you have to consider that there are always other choices. He could not work at all. He could work in the black market. He could work on an oil rig 2000 miles away. He could work like an undocumented migrant for less than minimum wage. There are many, many other choices he could make. Of all of them, he chose to work the minimum wage job, because it was the best for his situation. (Raising the minimum wage is essentially saying it is illegal for him to do what he thought was best for him, but that’s a different argument for a different day.)
So, let’s examine how the existence or non-existence of food stamps might affect the man working minimum wage and the employer. Let’s consider the two choices of not working at all, or working for minimum wage. If there were no food stamps, the option to not work at all would be very unappealing, as not working could potentially lead to starvation. Therefore, an employer would not have to offer a very high wage to entice someone to work for him instead of not working at all. If he had to choose between starving, or working for $7.15 per hour, he would probably work for $7.15 per hour. Even some money for food is better than none at all. However, with food stamps, the option of not working becomes more appealing. If he had to choose between eating low grade ramen and not working, or working for $7.15 per hour, and getting a higher grade ramen, he might just choose the leisure time. Therefore, in order to entice him out of that option, the employer must pay a higher wage.
Think of it this way. Imagine you hate your job. Tomorrow, you discover you won $250,000 in the lottery. It’s not enough to make you a millionaire, but it is enough that you could be comfortable not working for a while. You might decide to quit your job. If your employer wants to keep you, he would likely have to offer you more money to stick around, because now you have more options available to you. But, what would certainly NOT happen, is you deciding to keep working after your boss says, “Now that you have a nice nest egg, I have decided to lower your wages.” Indeed, that would solidify your decision to stop working. The fact that you have other options means that your boss cannot lower your wages if he wants you to continue working. Similarly, food stamps give low wage workers another option besides working or starving. Therefore, they will increase the wages needed to attract them to employment.
As we can see when examining choices closely, rather than suppress wages, the existence of food stamps forces employers to offer a higher wage, in order to attract workers who otherwise might choose not to work at all. Therefore, as with most arguments for increasing the minimum wage, this argument fails the economic test.