How to Raise Wages for the Poor

No, just boosting the minimum wage won't do it
By Walter Block, Loyola University
November 6, 2018 Updated: November 7, 2018

Contrary to the common narrative, even profit-seeking capitalists are concerned with the poor and how to improve their standard of living.

So what methods lead to increased compensation for the unskilled? The key to (permanently) boosting salaries for those at the bottom of the income distribution is to improve their productivity levels, for these, alone, determine remuneration.

Artificially escalating salaries through minimum wages won’t do it. Raising the price of labor above what especially small businesses can pay leads to unemployment and a future reduction in productivity.

President Donald Trump, unhappily, hasn’t even mentioned reducing the minimum wage, let alone eliminating it entirely. He has other battles to win first.

But eliminating or reducing the minimum wage would greatly help the poor who are unemployed because of this law. Their productivity, at this time, is below the price the law mandates to pay. Ditto for unionization; it, too decreases productivity through forcibly enacting higher wages.

Another difficulty is that the education system run by the state has rendered many poor people unfit for work. It’s no accident that we currently have more job openings than job seekers. All too many people still aren’t participating in the labor force.

How, then, can we best raise wages for the poor?

Capital and Training

One path is on the job training (OJT). If a worker can grasp even the lowest rungs of the employment ladder, that will enhance their value to his employer. He or she will learn basic skills, such as showing up for work on time on every scheduled day, not goofing off, refraining from fighting with customers, with fellow employees, with bosses, etc.

When the worker demonstrates those characteristics for a few months, that’s likely to earn a raise. Firms treasure reliable workers, and compensate them accordingly, lest they lose them to competing businesses. In the fast-food industry, for example, labor turnover exceeds 100 percent annually.

How else? One of the important ones is physical capital. Give a worker a teaspoon and tell him to dig a ditch, and his productivity is minuscule; A tablespoon is but a slight improvement. A pick and shovel and wheelbarrow will greatly improve output. Still, put the employee on a steam shovel, and productivity goes through the roof. As this example shows, capital, in reality, isn’t the numbers on the screen of a bond trader on Wall Street. It’s anything that helps humans work better.

But how to attract more capital?

Simple: improve investment rates. Don’t place international trade barriers against foreigners contributing to our economy in this manner. Lower domestic taxes. Protect private property rights. Embrace the rule of law. In a word, move as close to a system of laissez-faire capitalism as possible.

There is a wealth of empirical data demonstrating that the poor are best off in countries that have the most economic freedom. Adam Smith’s claim in the “Wealth of Nations” stems from this very source. This includes the poor, along with everyone else. The poverty-stricken in the United States have air conditioners, color television, cars, and basic dental and medical care, etc. These are the envy of most of the poor people in the world.

Human Capital

Then, too, there is human capital. Many economists will tell you along these lines that more education is required. But, remember, we are now addressing wage rates of those at the very low end of income distribution. Apprenticeships would be a far better way to attain this goal. Let’s end compulsory education until 16 years of age; let’s end it, period.

Compulsory schooling constitutes a 12-year jail sentence for youngsters who have committed no crime but suffer because they simply can’t sit still for traditional book learning. A little OJT for them, a pinch of employer appreciation for their efforts, and soon, their productivity will rise above present minimum-wage levels.

In order to coax additional capital into the market, people must save more. And they should do that without John Maynard Keynes giving them a bad conscience. His paradox of thrift, the dictum that additional savings reduce consumption—the fountainhead of the economy—just isn’t true.

The amount of savings constitute an upper limit on how much capital can be used for investment and increasing productivity. As we have seen, the more the better, in terms of wage rates. Why don’t people set more money aside for the rainy day? One reason is the inflationary policy of the Federal Reserve. Since its creation in 1913, it has dissipated more than 90% of the real value of the dollar. Let them cease and desist their mad policy of debasing the currency, and saving will increase.

With more capital cooperating with labor, wages for all will rise, including those of the poor.

Walter Block is the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University–New Orleans. He also is an adjunct scholar at the Mises Institute and the Hoover Institute.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.