The Public Policy

God and the Minimum Wage

Labor secretary Tom Perez has assumed the role of God's intermediary.

By 9.16.13

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Claiming divine mandate for his mission, new Labor Secretary Tom Perez received a standing ovation for his address to the AFL-CIO Convention last week in Los Angeles. But while labor leaders found much to praise in Perez’s agenda to grow the economy “from the middle out,” American workers and business owners should consider themselves warned.

In addition to calling for an immigration overhaul, announcing his intention to use his post to favor union organizing, and declaring that God told him that “the labor movement is our brothers’ keeper,” Perez relied on a series of hollow talking points to repeat his call for a higher minimum wage.

To support his position, Perez reached deep into his theological acumen to proclaim “it’s not possibly God’s will that people working a 40 hour week should live in poverty.” Unfortunately, while reducing poverty is a worthy goal, even supporters admit that higher minimum wages do nothing to alleviate poverty.

Alan Krueger, now an economic advisor to the president, and David Card authored the study perhaps most frequently cited by minimum wage advocates. Yet even they refer to the minimum wage as a “blunt instrument” for increasing the income of the poor, and note that the effect of minimum wages on the overall poverty rate is “statistically undetectable.” 

Perez rejected out-of-hand the “alleged studies” indicating that minimum wages decrease employment, calling the argument a “myth” which belongs in the “scrapheap.” While there is certainly debate among economists over whether minimum wages harm employment, the debate is far from settled, as Perez disingenuously implied. Indeed, the weight of academic research supports the traditional view that higher minimum wages dim job prospects, especially for the most vulnerable.

Lastly, Perez reiterated his circular argument that businesses benefit from paying higher wages because their employees turn around and spend more as a result. As he explained on Labor Day, “When we put more money in working families’ pockets, it boosts consumer demand, helping small businesses and jump-starting the entire economy.”

One might assume a large body of evidence exists to back such a sweeping statement. On the contrary, minimum wage advocates from the White House on down rely on a single, misinterpreted study.

In 2011, a study by Daniel Aaronson, Sumit Agarwal, and Eric French at the Chicago Federal Reserve analyzed how households with an adult minimum wage earner responded to a $1 increase in the minimum wage. They concluded that, in the year following an increase, household income rises by about $1,000 and spending by about $2,800.

But this does not mean that minimum wages provide an overall economic benefit.

First, the authors make it quite clear that the study does not take into account disemployment and other consequences of a higher minimum wage, explicitly warning that their study is “silent about the aggregate effects of a minimum wage hike.”

Second, any increase in spending is temporary and limited.

According to the study, the increase in spending came primarily from a small number of households purchasing durable goods, particularly new vehicles. As a result, much of the new spending takes the form of debt which, as the authors note in a separate publication, results in reduced future spending.

Furthermore, the authors determined that only about half of workers earning between 60 and 120 percent of their state’s minimum wage remained in that range two years later, leading them to conclude that higher minimum wages have little effect on income within two years of an increase.

In a truncated estimate released this summer, Aaronson and French applied their research to a proposed $9 federal minimum wage. Although the duo estimated that the higher wage would generate some additional spending nationally in the first year, their conclusion was unchanged from their initial study: while a higher wage may provide some stimulus “for a year or so,” it “serves as a drag on the economy beyond that.”

Minimum wage aficionados like Perez have indeed chosen curiously in relying on Aaronson and French to support a higher wage floor.

In a 2006 study, the researchers concluded that a 10 percent increase in the minimum wage lowers overall employment in the restaurant industry by two percent, and lowers low-skill employment by about three percent. One year later, they released another study which concluded that restaurant prices “unambiguously rise” in response to minimum wage increases. Higher prices not only suppress demand, but claw back part of any additional spending power some workers receive.

As with most market intervention by government, some individuals stand to benefit from higher minimum wages, but artificially increasing labor costs by government fiat is no way to produce widespread economic prosperity.

Perhaps the myth that higher minimum wages will solve our economic woes is the one which belongs on the scrapheap, Perez’s divine inspiration notwithstanding.

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About the Author

 Maxford Nelsen is the labor policy analyst at the Freedom Foundation in Olympia, Washington.