The Free Market is Better for the Poor

Blog Post - The Free Market is Better for the Poor

Pundits often claim that capitalists hold wages artificially low to maintain huge profit margins and perpetuate abject poverty for the working class. They fail to mention, however, that competitive labor markets increase wages as firms fight for the best talent and productivity. While they may think this sound idealistic, we see it happening as Target voluntary increases their minimum wage to $9 an hour.

Target did not suddenly become a benevolent charity fund, nor were they compelled by government mandates. They simply responded to a market change.

Earlier in the year, Wal-Mart announced it would be raising their minimum to $9 an hour as well. Why? Per the company blog, CEO Doug McMillon cited shifting consumer habits that demanded a better shopping experience. McMillon believes that reducing employee turnover via wage increases will meet consumer needs. He did not suddenly cave to employee strikes and protests.

For Target to maintain employment and productivity, they too must raise their minimum wage. If they do not, turnover will increase as employees begin to seek out the higher paying jobs at Wal-Mart and other competitors. The free market is improving quality of life by responding to consumer demand, but this isn’t the first and only time.

While pundits, such as Elizabeth Warren, claim that income growth has stagnated, real economic data shows otherwise. The St. Louis Fed reports that real compensation per hour has increased dramatically over the long term. Today, the compensation index is three times greater than the years following World War II. Long term wage growth is essential to eliminating poverty.

All around the world, abject poverty, defined as $1/day, has fallen by 80% since 1970. The total number of poor has fallen from 403 million to 152 million. Did this happen because “greedy capitalists” suddenly felt altruism that compelled them to raise wages? Of course not.

According to the World Bank, poverty reductions are attributed to growth resulting from economic liberalization. As markets develop and countries enter into trade, so too do poverty rates decline.

While firms use increasing wage rates to compete in labor markets, government poverty traps have accomplished nothing except more poverty and wasteful spending. According the FRED data, federal expenditures on welfare and social service programs $7.9 billion in 1970 to $187 billion in 2010.

Do these bloated programs alleviate poverty? A working paper at the National Bureau of Economic Research found that program incentives negatively affect family structure, which reduces the likelihood of wage growth. Policy changes in welfare spending, however, increased family earnings.

When government disrupts labor markets, the effects are devastating to low-income, low-skilled labor. Unintended consequences of such interventions are not seen for years to come, thus making them politically expedient. Minimum wage price floors make it costly to hire first time employees, thus reducing the lifetime earnings of said employee.

According to Census data, the large percentage of people in poverty do not have a job, which suggests employment alleviates poverty, not wage price floors set by government.

Research support this theory. Economists have found that minimum wage does help some poor families escape poverty, but, on the other hand, previously non-poor families are equally likely to fall into poverty. In other words, the resulting “raises” for some families comes at the expense of other families. Thus, the best possible result is break even. The long term result of government enforced minimum wage is, in fact, a net loss in lifetime earnings for low-income, low-skilled job seekers.

The alleviation of poverty is a noble cause and one that should always be held with upmost importance. Successful measures to that end, however, are more effective in the free market. Government programs and mandates have proven to be unsuccessful while costing billions of tax dollars and unquantifiable economic losses. Free markets, however, respond to consumer demands and changing markets to raise wages in a competitive labor market.

The poor are better off without the government making decisions on their behalf. True freedom means pursuing economic liberty.

Tags: Economics

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