Minimum Wage: Good Intentions, Bad Policy

Minimum wage laws are politically sacrosanct; politicians who argue against increasing the minimum wage commit political suicide. Voters believe that minimum wage laws are necessary to ensure that low-skilled workers, especially new entrants, teens and minorities, earn a living wage and are not exploited by greedy capitalists.

Echoing this sentiment, President Obama in his 2013 State of the Union Address proposed to increase the federal minimum wage to $9 an hour claiming that, “This single step would raise the incomes of millions of working families.” Similarly, a March 27 Miami Herald editorial argued for state legislators to “Stop assault on fair-wage laws.”

These are laudable ideals, but do minimum wage laws produce the desired results?

Our distinction as humans is that we survive, not by sharpness of tooth or claws, but by sharpness of mind, an attribute we do not seem to use when thinking about minimum wage laws. The cruel and unspoken irony is that minimum wage laws do the most harm to the segments of our society that we seek to help — the unskilled poor and the inexperienced youth.

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Intuitively we all understand the fundamental principle of economics that when the price of anything increases, the quantity demanded of that good or service will decrease. The wage rate is the price of labor; if the cost of labor is increased via a government command, the quantity of labor demanded will decrease. Simply put, with other things constant, the number of jobs offered will decrease when the minimum wage is artificially increased. The case against minimum wage decrees is pellucid and straightforward: Increasing the cost of job creation will decrease job creation.

Even as I write this, I can hear the angry criticism, but pray tell: How exactly does mandating an increase in the price of labor help the unemployed?

Even worse, the resulting decrease in employment becomes permanent as employers shift to labor-saving production technologies or to outsourcing abroad. True, those who keep their jobs will earn more, but others will lose their jobs or fail to get one when new jobs are not created. Many who live in poverty are unemployed and thus will not benefit from an increase in the minimum wage. In fact, their prospects for employment will diminish.

Let’s be clear: Enacting a higher than market minimum wage law does not result in a higher income for all workers, only for those who retain their jobs. And this increase will be at the expense of those who will become or will remain unemployed.

We know this, and yet minimum wage laws remain popular with public officials and with voters who want to express their compassion for the working poor. A more cynical reason is that advocating for an increase in the minimum wage is a way of making political points without having to account for an increase in government expenditures since the cost is presumably borne by employers. Unlike government, however, employers cannot print money and the increased costs will be passed on to consumers in the from of higher prices, or will be shouldered by those that will not be able to find a job because their skills do not command a wage level dictated by government fiat.

Hysteresis is the dependence of a condition not only on the current environment but also on its past environment; the lagging of an effect behind its cause. When government policy prices low-skilled workers and the inexperienced young out of the job market, skills atrophy, hope fades and, tragically, unemployment becomes a way of life.

Our current persistent unemployment levels among the disadvantaged may very well be the hysteresis or lagging effect of our unreflective support of minimum wage laws. Sixty years ago the unemployment rate of 16-19 years old was less than 8 percent. Today, after many rounds of minimum wage increases, youth unemployment is over 24 percent and close to 40 percent for black teenagers. Are minimum wage laws responsible for creating this new normal?

The proposition that government can diminish poverty by making it more expensive for businesses to hire young and low-skill workers is illogical and, worse, it is dishonest. If government can diminish poverty by enacting a $9 minimum wage as claimed by the president, why stop there? Let’s raise the minimum wage to $90 an hour and eliminate poverty altogether.

This is, of course, nonsense and so are minimum wage laws. We will not get good results from implementing a bad idea. Advocating for a higher minimum wage mandate is equivalent to advocating for higher unemployment.

This article first appeared in the Miami Herald.

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