Commentary

A Minimum Wage Hike Is the Wrong Direction for America

Passage by the House of Representatives of the Fair Minimum Wage Act of 2007, as part of the Democrats’ first 100-hour agenda for “A New Direction for America,” was a step in the wrong direction. It leads our nation further astray from the limited government, market-liberal order envisioned by the Founding Fathers. It appears the Senate is about to make the same mistake.

Many in Congress seem to have forgotten that their powers are enumerated and thus limited by Article 1, Section 8 of what George Washington in his first inaugural address in 1789 called “the great constitutional charter” designed to preserve “the sacred fire of liberty” and the “republican model of government.”

Instead of setting a framework for freedom under the law — based on the liberal principles of private property, freedom of contract, and limited government — the 110th Congress is anxious to “do something,” even if it conflicts with true liberalism. A case in point is the feel-good minimum wage increase from $5.15 an hour to the proposed $7.25 over the next 26 months.

In a free society, employers should have the right to hire and fire workers and to pay them wages that are mutually agreed upon, and workers should have the right to freely compete for jobs and, thus, to accept employment at mutually beneficial wage rates. A worker’s minimum acceptable hourly wage, of course, will depend on his or her next best alternative employment opportunity and, hence, on the value of his or her productivity in the marketplace.

Arbitrarily increasing the legal minimum wage simply increases the price of labor without changing a worker’s skill level or other conditions that lead to low wages. Congress cannot repeal the law of demand by a stroke of the legislative pen. When the real (inflation-adjusted) minimum wage rises above the prevailing market wage for unskilled workers, employers will cut back on hours, reduce benefits, and introduce labor-saving methods of production. This is common sense.

Big businesses such as Wal-Mart can weather a 20 percent increase in the federal minimum wage, but small businesses, especially in low-wage states, will suffer. In a recent study in the Cato Journal, Thomas Garrett and Howard Wall, economists at the Federal Reserve Bank of St. Louis, find that “in the relatively poor states the federal minimum wage results in fewer entrepreneurs and fewer of the benefits that entrepreneurship can bring.”

Government interventions such as the minimum wage destroy opportunities for the least skilled members of society. The government promises low-skilled workers higher wage rates, but their incomes will be zero if they lose their jobs. Contrary to popular opinion, a minimum wage law is not “progressive” legislation. Rather, it prevents progress by limiting the options of poor people.

Those who favor increasing the federal minimum wage seem to assume that people will remain poor unless government lifts them out of poverty. That presumption is nonsense on stilts. Hong Kong, whose motto is “big market, small government,” has no minimum wage and has one of the highest living standards in the world.

Even China, where a recent poll by GlobeScan found that 74 percent of the respondents agreed that the market system is the best way to organize economic life, has no national minimum wage, and poverty has been substantially reduced by economic liberalization.

Empirical evidence has shown that an increase in the minimum wage can actually increase poverty. In a 2005 article in the Journal of Human Resources, David Neumark and his co-authors found that the “net effect” of an increase in the minimum wage is “to increase the proportions of families with incomes below or near the poverty line.”

Unfortunately, a large majority of Americans favor an increase in the minimum wage. They underestimate the negative consequences of that policy. But more fundamentally, they fail to recognize the danger to a free society in implementing such a plan.

If Congress passes and President Bush signs a new federal minimum wage law there will be a further drift away from the liberal principles that have made America the land of opportunity. Alternatively, doing nothing or abolishing the federal minimum wage would create new job opportunities for low-skilled workers, spur development in poorer states, and, ironically, help lift people out of poverty as they gain experience.

A new direction for America should not be a false progressivism but a swing back toward true liberalism, or what Thomas Jefferson called “a wise and frugal government, which shall restrain men from injuring one another” and “shall leave them otherwise free to regulate their own pursuits of industry and improvement.”

James A. Dorn is professor of economics at Towson University and editor of the Cato Journal.