Commentary

Minimum Wage Socialism

This article appeared on Examiner.com on July 4, 2006.

Communism may be dead, but socialism is alive in the many forms of government intervention we see daily in the marketplace.

One widely accepted policy — the minimum wage — is appropriately reflected in Karl Marx’s dictum, “To each according to his needs, from each according to his ability.”

When Maryland legislators increased the minimum wage from $5.15 to $6.15 in February (overriding Gov. Robert Ehrlich’s veto), they did so because, as House Majority Leader Kumar P. Barve, D-Montgomery, put it, “If you want to have a stable society where hard-working poor people can support their families, you have to do things like this.”

That sentiment was echoed more recently in Washington when 52 senators voted for an increase in the federal minimum wage (frozen since 1997) from $5.15 to $7.25 per hour over the next three years.

Sen. Ted Kennedy, D-Mass., argued that such an increase is “a matter of decency and fairness,” given that Congress has awarded itself a number of pay raises.

The idea that legislators can help low-income workers simply by mandating a pay raise is the height of hubris. While the minimum-wage rhetoric may sound good, the reality is quite different. Forcing employers to pay low-skilled workers a higher than market wage — in the absence of any changes in productivity — will decrease the number of workers hired (the law of demand).

The National Federation of Independent Business estimates that if the federal minimum wage is increased to $6.65 per hour, nearly 217,000 workers would lose their jobs. The long-run consequences would be even more severe, as employers introduced labor-saving equipment and technology.

In fact, many entry-level jobs actually pay more than $5.15 or even $6.15 per hour, so the idea that without the minimum wage, workers would be exploited is a myth. In competitive markets, such as fast food and retailing, employers who pay below-market wages will not be able to attract sufficient help. McDonald’s is paying up to $8 per hour in Panama City, Fla., for example.

Yet it is easy for the “legislator gods” in the state House or in Congress to take credit for increasing the pay of the poor while disavowing any negative consequences from pricing low-skilled workers out of the market. A minimum wage of $7.25 per hour translates into an income of zero if a worker cannot find a job or is fired.

It would be much wiser to let workers and employers freely negotiate wages than to enact a minimum wage law that interferes with freedom of contract and prevents low-skilled workers from gaining the experience and work ethic necessary to achieve higher living standards.

David Neumark, an economist at the University of California, Irvine, has found that increasing the minimum wage does not reduce poverty. Rather, for every 10 percent increase in the minimum wage, he estimates that the poverty rate increases by 3 percent to 4 percent. Contrary to the rhetoric, therefore, the people harmed the most by minimum-wage legislation are precisely those it is intended to help — the poor.

Increasing the minimum wage may give “liberal” legislators great pride and win them votes, but it does not address the key issue of how to achieve economic growth and thus reduce poverty. Hong Kong has no minimum wage but is one of the most prosperous economies in the world — because it is also the freest.

Economic freedom, not minimum-wage socialism, is the key to reducing poverty, as China is learning. If legislators really want to help the poor, the best thing they can do is abolish, not increase, the minimum wage.

In America, the majority of low-income earners typically move up the income ladder by improving themselves, not because of the minimum wage. Policies that increase competition and choice in public education, reduce marginal tax rates on capital and labor, and protect private property rights would be positive steps toward increasing economic freedom, workers’ dignity, and prosperity.

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