Real median household income in the United States has fallen more than 8 percent since Barack Obama was first sworn in as president, and has even fallen during the course of the Obama “recovery.” That, of course, is the fault of George W. Bush, John Boehner, rich people, and ATM machines. Fortunately, President Obama and his economic advisors have come up with a solution to this problem: force businesses to pay their employees more.
The president talks a lot about public/private partnerships, like he did during his state of the union address. What he means is compelling businesses to become partners in the Welfare State. Through Obamacare, he and his Democratic allies have mandated that it is the responsibility of businesses to provide their employees Obama-approved insurance, which must include all the bureaucrats’ favorite bells and whistles, like free contraceptives (not having free contraceptives, after all, is tantamount to “denying women access to birth control”). With that accomplishment under his belt, he has now come forth with a perennial favorite of the Democratic Party, raising the minimum wage.
Already hit hard by the impending costs of the Obamacare mandates, industries with large low-wage workforces, such as food service, janitorial, landscape maintenance, and low-end retail, are now facing the possibility of a 24 percent rise in the minimum wage, from the current $7.25 per hour to $9 per hour. This could, it would seem, bust many a company’s labor budget. But not to fret. According to the president, this will be good for business because “it would mean customers with more money in their pockets.”
Anyone who has followed politics for more than three days knows that politicians are prone to making some of the dumbest comments that supposedly highly educated people can make. This is one of them. It’s not a new one, of course; Democrats make it every time they argue for an increase in the minimum wage, as do a variety of liberal commentators. But that doesn’t make it any less of an embarrassment for anyone with a shred of intellectual integrity.
Where, an inquiring mind might ask, will the money come from that the president says will fill the pockets of customers? It comes from the pockets of the business owners or from the businesses’ other customers, who now have to pay higher prices. So how does moving the money from one pocket to another help the economy? The short answer is, it doesn’t.
This is not complicated stuff. So why does simple economics (and logic) befuddle so many liberal policymakers and commentators? Liberals are naturally drawn to the Keynesian notion that spending is good and savings are bad, and they apply it rather indiscriminately. The middle-income people who bear the brunt of minimum wage increases, however, do not have impressive savings rates. The argument that it benefits the economy to shift a few dollars out of some people’s savings accounts (dollars that would go toward future expenditures: houses, or cars, or college educations) and into the hands of poorer people who are more likely to spend those dollars immediately is bad economics. But the real reason many support an increase in the minimum wage is not that they think it will help the economy. They support it for ideological reasons; it is another way to redistribute wealth.
John Cassidy, writing for the New Yorker in a piece entitled “The Case for a Higher Minimum Wage,” put it quite clearly: “In the current political environment, there is little chance of pushing through another hike in income-support programs. Raising the minimum wage pushes the burden onto corporations and consumers.” Translation: Corporations (and partnerships and sole proprietors) and consumers should be forced by government to pay more for goods and services so that wealth can be transferred to low-wage workers. Again, in the mind of President Obama, and his supporters like Mr. Cassidy, government should use its coercive powers to compel businesses and their customers to be extensions of the Welfare State.
Those on the left brush aside the argument that increasing the minimum wage decreases employment opportunities for lower skilled workers. They point to the fact that the unemployment rate decreased during President Clinton’s second term despite a two-part increase in the minimum wage in 1996 and 1997. They also point to studies such as one from the Keystone Research Center, which concluded that Clinton’s minimum wage hikes had a “small and statistically insignificant” effect on job losses. So a supposed economic law — that if you increase the price of something (all other things being equal) you decrease the demand — must be all wet, the creation of old fuddy-duddy economists who can’t understand the new liberal world order. (On the other hand, though, liberals are all for raising taxes on gasoline and cigarettes, because raising the price of those items will reduce demand for them).
If the economy is growing at a decent clip, as it usually does (the last four years notwithstanding), a small increase in the minimum wage may very well not be a big enough counterweight to cause a reduction in low-wage employment. But that hardly means that the effect wasn’t a reduction from what it otherwise would have been. A study by the Employment Policy Institute, for instance, showed that despite the overall rise in employment, employment for teenagers — who largely make at or near minimum wage — actually fell in the year after the initial Clinton minimum wage increase in October 1996. And most studies of previous rate hikes (such as 1990-1991) show clear evidence of job losses. One reason why some have found the data from 1996-1997 more ambiguous is that the minimum wage lagged behind inflation and real wage growth. Thus, the relatively modest 1996-1997 rises pushed the minimum wage above the fair market value of fewer workers than in the past. Likewise, the rise to $5.85/hr. in 2007 (still a year of good employment growth) only represented a 13.6 percent increase from the still-in-effect 1997 level of $5.15, well below the increase in the consumer price index for that period. But the 1997 increase was only the first phase of a multi-year increase that took the minimum wage up another 24 percent, to $7.25 by July 2009. I have not seen any studies suggesting that this further increase was benign in its effects on low-wage employment. Certainly, the raw data is not encouraging. Whereas the number of employed people in the U.S. fell by about 4.6 percent from July 2008 to July 2010, for teenage workers (a reasonable proxy for minimum wage workers), employment fell by a whopping 21 percent.
The hike proposed by President Obama represents a further increase of 24 percent from the $7.25 level set in July 2009, even though the consumer price index has only risen 6.6 percent. This would put the federal minimum wage even substantially higher than most elevated state minimum wages, such as California ($8.00/hr.) and Illinois ($8.25/hr.). The effects on employment, therefore, would not likely be as ambiguous as in 1996-97 or 2007. Furthermore, Obama has proposed indexing the minimum wage to inflation, thus locking in its deleterious effects on employment.
An official with an Atlanta area Sheet Metal Workers Union local was recently quoted in the Wall Street Journal complaining that a certain provision of Obamacare would result in an increase in the price of union labor of between $0.50 and $1 an hour. Why is he concerned about that? Because he doesn’t live in the sheltered halls of government, liberal think tanks, or the New Yorker, but rather in the real world. He understands that higher union labor costs mean fewer union jobs.
One reason the Left has a difficult time accepting that raising the minimum wage reduces low-wage employment is an imbedded belief that most employers exploit low-wage workers to make big profits. Forcing up the price a little won’t cause employers to bat an eye, the logic goes. To quote again from John Cassidy: “With the decline of trade unions and the spread of aggressive management techniques, low-paid workers now have little bargaining power and few legal protections. Only the government can ensure that they receive a living wage.” This comes not from a study of reality but is the product of an ideologically constructed worldview. I don’t know what a “living wage” means, and I doubt Mr. Cassidy can be precise on that matter (though San Francisco has legislated it as $10.55 an hour). But Mr. Cassidy’s meaning is clear: Without government intervention, most businesses will exploit their low-skilled workers and not pay them what they deserve. Mr. Cassidy’s argument is short on facts, and that’s because the facts tell a dramatically different story.
In the labor market, wage increases are driven by productivity — by experience, training, and other factors. People who started working at the minimum wage one or two years ago have very likely already achieved wage increases through the workings of the market, not by government decree. For instance, if low-wage workers were really dependent on action by the government to obtain wage increases, the number of workers earning the minimum wage would have steadily risen during the period 1981 to 1990 when the minimum wage did not increase (thanks to Ronald Reagan). What occurred, however, was dramatically different from what Mr. Cassidy would have us believe. The number of Americans earning the minimum wage fell by 50 percent. Despite nine years’ worth of new entrants in the job market, the number of minimum wage workers fell by some 4 million.
A similar 10-year hiatus in minimum wage increases took place between 1997 and 2007 and showed remarkably similar results. In 1997, 4.75 million Americans were earning at or below the minimum wage (6.7% of the hourly paid workforce). In 2006, the number had fallen to about 1.7 million (or 2.2% of the workforce). If low-wage workers are dependent on government to protect them from exploitative employers, then how did this happen? The fact is the labor market in this country, even for low-skilled workers, is pretty efficient.
We have a president, however, who feels much more at home crafting policy using as his prism the mythology of left-wing class struggle than the reality of free market economics. And that’s why his presidency has been an economic disaster.