Research Paper about The Minimum Wage

The minimum wage is commonly a hot topic in the news in today’s society. How much should it be? How should it be implemented: federally or locally? Should we even have any minimum wage? These are all questions that surround the debate, however, before any of these queries came to arise, Adam Smith was one of the pioneers to popularize the idea of a minimum wage, or at the very least a minimum standard of living. Smith first introduces his ideas for why we need a minimum standard of living and how it can be achieved in chapter 8 of Book One in The Wealth of Nations, starting off with, “there is, however, a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour. A man must always live by his work, and his wages must at least be sufficient to maintain him” (Smith 57). Here Smith is basically saying that there comes a point where bosses cannot pay their workers below a certain threshold because men should be able to live sufficiently off of their work. In explaining his reasoning for why he believes this, he states, and contrary to economic intuition, that it is in the best interest of the boss to do so. One might assume that it is in the best interest of an owner to pay their workers less, however, if a worker does not earn enough to survive, then they will eventually not be able to work. Subsequently, they will not be able to support a family and raise children who could also potentially become workers. In order to support a family Smith claims that a working man must earn at least double the funds necessary to support himself, so that the surplus can go towards raising children. Smith continues by pointing out how wages of labour are higher in countries with more growth, “It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. England is certainly, in the present times, a much richer country than any part of North America. The wages of labour, however, are much higher in North America than in any part of England” (Smith 59). The reason wages are higher in countries with rapid growth is because there are more job openings and a higher demand for jobs. This higher demand then leads to bosses and owners needing to compete for labor, and to win the competition they drive up wages.

Smith’s overarching premise is that even within a capitalist economy consisting of owners and workers, the workers will still be able to earn a sufficient living. Even in a society where the bosses should intuitively drive wages down, that will not happen. Even during Smith’s time when labor unions were banned, and owners could collude, there were still a multitude of reasons for why wages would stay high enough to suffice a worker and their family. It is in the best interest of the owners to pay a higher wage so that their workers can lead a healthy and prosperous life, such that they continue to work alongside raising children who will become future workers. Not only is it in the best interest of a boss, there are certain circumstances in a market economy in which owners will be forced to pay a higher wage. This occurs during high periods of growth in which the demand for labor increases. Imagine a new society where new innovations are being developed rapidly, people need to build roads, man the ports, work in the factories and more. There are a lot of job spaces to fill with limited people, so in order to attract the most skilled labourers, a manager will pay a higher price.

Does Smith provide the best case for a minimum standard of living in a capitalist society? Yes and no. He provides reasonable claims to come to his conclusion, but he is missing certain points that could strengthen his argument. Firstly, not only is it in the best interest of a boss to pay a higher wage in order to keep his workers alive, it is in their best interest because more disposable income allows for more spending. If a working class person did not have to struggle to survive between each paycheck and possessed some disposable cash, it is likely that they will reinvest that money into the economy. They could use that money to support themselves, as well as other businesses by purchasing extra food, clothing, or leisure products. They might even choose to invest their money in a business. Overall, allowing the working class to have more money benefits the economy. 

To connect Smith’s ideas to the present day, it is clear to see where he was correct, and where his ideas fell short. It is true to some degree that companies try to pay enough for their workers to live sufficiently, for example Amazon now pays a minimum of $18 per hour, a price greater than the minimum wage set by the government, however, there are still plenty of companies who default their wages to that set by the government and do not pay more. As for the price of wages during times of growth this is partially true depending on the status of the nation. For example, in a post war United States, the purchasing power of the minimum wage increased for decades until it started to decline, however, in other developing nations such as those in southeast asia, although they are in their early stages of potential growth, wages in these countries are extremely low, such that companies from outside countries outsource their labor in these countries for a lesser price. While Smith’s ideas for a minimum standard of living were revolutionary for his time, there was only so much he could understand about how the global economy would develop, therefore leading to some major gaps in his reasoning.