May 4, 2015 9:05AM

Raise the Wage Act Is More Rhetoric than Reality

When U.S Congressman Robert C. “Bobby” Scott (D-VA) and U.S. Senator Patty Murray (D-WA) introduced the Raise the Wage Act on April 30, they promised that their bill would “raise wages for nearly 38 million American workers.” Their bill would also phase out the subminimum tipped wage and index the minimum wage to median wage growth.

With rhetorical flourish, Sen. Murray said, “Raising the minimum wage to $12 by 2020 is a key component to helping more families make ends meet, expanding economic security, and growing our economy from the middle out, not the top down.”

The fact sheet that accompanied the bill claims that passing the Raise the Wage Act would reduce poverty and benefit low-wage workers, especially minorities. Indeed, it is taken as given that the Act “would give 37 percent of African American workers a raise”—by the mere stroke of a legislative pen. It is also assumed that “putting more money into the pockets of low-wage workers stimulates consumer demand and strengthens the economy for all Americans.”

The reality is that whenever wages are artificially pushed above competitive market levels jobs will be destroyed, unemployment will increase for lower-skilled workers, and those effects will be stronger in the long run than in the short run.  The least productive workers will be harmed the most as employers substitute new techniques that require fewer low-skilled workers.  There will be less full-time employment for those workers and their benefits will be cut over time.  That is the logic of the market price system.

To deny that logic and, hence, to ignore the law of demand, is to destroy the opportunities that would have otherwise existed.  The minimum wage law increases the price of labor without doing anything to increase a worker’s skills or experience or other traits that would allow that worker to remain employed and earn higher wages in the future.  Moreover, if that worker loses her job because she is priced out of the labor market, her income is zero.

Some workers, particularly those with slightly higher skills, more experience, or better work habits, may retain their jobs at the higher minimum wage, but other workers will lose their jobs or won’t be able to find jobs.  If workers lose their jobs, it is against the minimum wage law to offer to work at the old wage rate—or for employers to hire at that wage rate.  Hence, the minimum wage law restricts freedom of contract and prevents many workers from climbing the income ladder.

Contrary to what proponents of the minimum wage promise, an increase in the minimum wage cannot benefit all workers or all Americans.  Workers who lose their jobs or become unemployable at the higher minimum wage will have lower—not higher—real incomes.  They will have less, not more, spending power.

Linking the minimum wage to the growth of the median wage is a sure way to permanently block some lower-skilled workers out of the market and keep them in poverty.

Proponents of the Raise the Wage Act justify the higher minimum by arguing that inflation has eroded the purchasing power of the nominal minimum wage.  The fact sheet states that “the real value of the minimum wage . . . is down by more than 30 percent from its peak value in the late 1960s.”  That comparison is largely irrelevant.  What matters is whether the nominal minimum wage is above the nominal market wage rate for low-skilled workers.

No one knows ex ante what the market-clearing wage for low-skilled workers should be, but we do know that the higher the minimum wage is above the prevailing market wage, the greater the number of jobs that will be lost, the higher the rate of unemployment for that category of labor, and the slower the job growth.  We also know that the minimum wage is an ineffective means to reduce poverty, and that an increase in the minimum wage would benefit mostly non-poor families.  

Many studies have strong empirical evidence in support of these effects.  For a summary of some of the many studies that show the negative effects of minimum wage laws, especially in the longer run, see “Minimum Wages: A Poor Way to Reduce Poverty” (Joseph J. Sabia), “The Minimum Wage and the Great Recession: Evidence of Effects on the Employment and Income Trajectories of Low-Skilled Workers” (Jeffrey Clemens and Michael Wither), and “The Minimum Wage Delusion and the Death of Common Sense” (James A. Dorn).

Black teen unemployment is abysmal, especially for males.  Raising the minimum wage will make it more so.  Poverty is best reduced by gaining education and experience, not by mandating higher federal minimum wages.  There is no free lunch.  Congress can’t promise workers a pay raise without adverse consequences for those that are priced out of the market.  A more accurate name for Raise the Wage Act would be “Job Destruction Act”—under which Congress makes it illegal to hire low-skilled workers at a rate less than the legal minimum wage—even if they are willing to work at the free-market wage rate.

Raise the Wage Act is a feel good bill, not an effective way to reduce poverty or create jobs for low-skilled workers.  Removing barriers to competition and entrepreneurship, lowering taxes on labor and capital, improving educational opportunities, and lowering inner-city crime would do more to help the poor than rigging the price of labor and making promises that can’t be kept.