Minimum Wage Solidarity Misplaced

Senate Democrats are anxious to bring the Minimum Wage Fairness Act (S. 1737) up for a vote to express their solidarity with “progressives.”  That solidarity, however, is misplaced. The bill is not a panacea for the prosperity of low-skilled workers; it is anti-free market and immoral—based on coercion not consent.

The bill would increase the federal minimum wage to $10.10 after two years, index it for inflation, and increase the minimum for tipped workers.  Those changes would substantially increase the cost of hiring low-skilled workers, lead to job losses and unemployment (especially in the longer run as businesses shift to labor-saving methods of production), and slow job growth.

Although there is virtually no chance this bill would pass, Senate Majority Leader Harry Reid (D-Nev) wants it to come to the floor so he and his compatriots can express their support for low-income workers (and for unions and others who support the minimum wage increase) in an election year.  “Democrats are focused on the future,” says Reid, and “we were elected to improve people’s lives.” 

In a recent email, the Agenda Project Action Fund provided talking points and instructed recipients to contact their senators to bring the minimum wage issue to the floor for debate.  Erica Payne, founder of the Agenda Project, believes “a higher minimum wage is consistent with free market principles” and that conservatives should support the increase.  The talking points include assertions that “raising the minimum wage is a boon to business” and “will not lead to job loss.”

The Agenda Project’s goal is “to build a powerful, intelligent, well-connected political movement capable of identifying and advancing rational, effective ideas in the public debate and in so doing ensure our country’s enduring success.”  Those are admirable goals but the minimum wage is neither a rational nor effective means of attaining them.

Companies like the Gap and Costco, which have increased entry-level wages, do so because they expect those voluntary increases to be profitable in the long run.  Such actions are consistent with free market principles, unlike a minimum wage law that forces employers to pay more than the prevailing market wage and prevents workers from contracting for less than the legal minimum in order to retain or secure a job.

It is disingenuous to deny the law of demand: when a worker’s skill level and experience do not change and the government mandates a higher minimum wage that exceeds those workers’ productivity, employers will hire fewer workers.  Importantly, the negative impact on jobs for low-skilled workers will be stronger in the long run than the short run.  But politicians focus on the short run and argue that small increases in the minimum wage will not harm jobs.

Rationality depends on taking the long view and using the logic of the market to analyze the impact of the minimum wage and other policies.  Common sense and a massive amount of empirical evidence show that raising the minimum wage is not an effective solution to poverty or unemployment. The minimum wage rhetoric is one thing, reality another.

In a recent Tax & Budget Bulletin for the Cato Institute, noted labor economist Joseph J. Sabia of San Diego State University, presents a strong body of evidence that minimum wage increases adversely affect employment opportunities for lower-skilled workers and those who do benefit mostly come from non-poor households. That evidence, supported by numerous peer-reviewed journal articles, is in direct contrast to The Agenda Project’s contention that “since 1994, studies have found there is little to no evidence of employment reduction following minimum wage increases at both state and federal levels.”

The idea that a higher minimum wage will “drive the economy” and fuel economic growth is an illusion.  Workers must first produce more if they are to be paid more and keep their jobs.  A higher minimum wage is neither necessary nor sufficient for economic growth. Some workers would gain but others would lose, as would employers who are crowded out of the market or have fewer funds to invest, and consumers who have to pay higher prices. There is no free lunch.

The minimum wage redistributes a given economic pie, it doesn’t enlarge it.  The only way to “drive the economy” is to raise productivity, not the minimum wage.  The key factors that improve real economic growth—and lead to a higher standard of living—are institutional changes that safeguard persons and property, lower the costs of doing business, and encourage entrepreneurship.  Those institutions are endangered by the politicization of the labor market.

When New York State increased its minimum wage by 31 percent (from $5.15 an hour to $6.75) in 2004–06, the number of jobs open to younger, less-educated workers decreased by more than 20 percent, as Sabia, Richard Burkhauser, and Benjamin Hansen found in a landmark study published in the Industrial and Labor Relations Review in 2012.  An increase in the federal minimum wage from $7.25 an hour to $10.10 would no doubt have a similar impact.

In another study, Sabia and Burkhauser found “no evidence that minimum wage increases between 2003 and 2007 lowered state poverty rates” (Southern Economic Journal, January 2010). Those workers most apt to lose their jobs as a result of a higher minimum wage are from low-income households. Hence, an increase in the minimum wage can actually increase poverty.  As David Neumark, Mark Schweitzer, and William Wascher noted in the Journal of Human Resources (2005), “The net effect of higher minimum wages is . . .  to increase the proportion of families that are poor and near-poor.”

Proponents of the higher minimum wage downplay those adverse consequences and point to widespread public support—and politicians like nothing better than polls to guide their agendas. The public supports higher minimum wages because they haven’t thought about the longer-run consequences. Most polls simply ask, “Are you in favor of a higher minimum wage?” without saying anything about the loss of jobs and unemployment that will occur.  When those costs are taken into account the majority swings against an increase in the minimum wage, as shown by Emily Ekins.

When legislators mandate a minimum wage above the market wage determined by demand and supply they deprive workers and employers of the freedom of contract that lays at the heart of a dynamic market economy.  The wealth of a nation is not enhanced by prohibitions on free trade—whether in product, labor, or capital markets.  People should be free to choose and improve. If low-skilled workers can’t find a job at the minimum wage, they won’t have the opportunity to fully develop themselves and move up the income ladder.

Groups that are pushing for a higher minimum wage may have good intentions but they discount—or fail to understand—the longer-run adverse effects of that legislation on freedom and prosperity.  They only look at those who may benefit from a higher minimum wage, including union members, while downplaying the inevitable shift to labor-saving technology that will occur over time and the jobs that will never be created.

Those who argue that there is a moral case for a higher minimum wage seem to think that using the force of government/law to mandate wage rates that are greater than those freely negotiated in markets is both “fair” and “just.”  Yet the minimum wage by its very nature interferes with freedom of contract and, in that sense, is unjust. Moreover, it prevents mutually beneficial exchanges. A young worker with little education and few job skills who is willing to work at less than the minimum wage to get a job and gain experience is prevented from doing so.  How can that be “fair?”

Instead of solidarity, minimum wage proponents create dissent when workers find that prosperity cannot be created by a stroke of the legislation pen.  Politicians may promise a higher wage rate to low-skilled workers but for those workers who lose their jobs, their incomes will be zero.  Even the CBO thinks the Obama promise of $10.10 an hour, if implemented, would lead to at least 500,000 fewer jobs for those the law is intended to help.  

The Minimum Wage Fairness Act is the wrong medicine for improving the plight of low-income families and creating a prosperous nation. Poverty is not abolished by legislative fiat.  Rather, the path toward economic growth and well-being is paved with genuine free markets and limited government, and by thinking in terms of long-run effects of current legislation, not short-term benefits to special interests.