Once again Democratic politicians want to increase the dosage of a popular but extremely toxic form of public policy snake oil. In his State of the Union message Tuesday President Obama proclaimed, “Tonight, let’s declare that in the wealthiest nation on earth no one who works full time should have to live in poverty, and raise the minimum wage to $9 an hour. We should be able to get that done.” Pat Quinn, the governor of Illinois, last week proposed raising his state’s minimum wage from the current $8.25 an hour to $10 an hour.
A spokesman for Governor Quinn said, “The governor feels very strongly that nobody should work 40 hours a week and live in poverty. It’s obvious the governor feels such an increase will be good for the economy and good for workers who drive our economic growth. So many people are struggling to make ends meet earning the basic minimum wage—and these ends never get met.” If that’s what the governor thinks, he couldn’t be more confused.
As H. L. Mencken observed, “There is always an easy solution to every human problem—neat, plausible, and wrong.” Minimum wage laws score extremely well on all three counts.
Minimum wage laws are an important public policy issue not only for the damage they do to individuals and the economy, but also as an illustration of the profound difference between liberal and conservative approaches to problem solving.
The federal minimum wage for 2013 is $7.25. San Francisco, not surprisingly, has the country’s highest minimum wage—$10.55
When I taught economics, when possible I liked to use the “Socratic method,” which is essentially teaching by asking questions. The Socratic method helps the student deduce the answer by using what he already knows.
Most people, especially college freshmen and sophomores, feel that minimum wage laws are beneficial. When discussing the topic I would ask, “If a minimum wage of $8 is better than one of $5, why skimp? Why not make the minimum wage $10, or $20, or $30?” Passing minimum wage laws is relatively easy. If eliminating poverty is that easy, why not go all the way? Why be so miserly? It’s not your money you’re spending. Go big or go home!
Most people realize that a minimum wage of $30 or $50 an hour would not work or be a good idea. They recognize that employers simply could afford to hire far fewer people at such wages. Most people can appreciate that not everyone is worth $30 an hour. Minimum wage laws at those levels would do major damage to the economy. Less obvious is the fact that virtually any minimum wage does the same kind of damage.
A favorite talking point of minimum wage proponents is the so-called “living wage.” They argue that the minimum wage is the absolute least a person can survive on. But why settle for mere survival? Why not set it high enough to move every working person into the middle class?
President Obama said in his speech, “But today, a full-time worker making the minimum wage earns $14,500 a year.… Even with the tax relief we put in place, a family of four who earns the minimum wage still lives below the poverty line. That’s wrong.” A minimum wage of $30 would give that family an annual income of $60,000. Go for it!
Minimum wage laws are one of the many ways the government commandeers private companies into its ill-conceived crusades for solving societal problems (the “war on poverty,” for example). It is essentially a form of “taking,” that is, the taking of private property for public use without compensation. Such laws ought to be considered a violation of the Fifth Amendment. Minimum wage laws force private companies to supposedly help solve the societal problem of poverty. If you start a business, be prepared not only to provide a product or service for your customers, but also to provide a service for politicians.
It’s an easy and alluring fix for politicians. Rather than having to tax the private companies and spending the proceeds on welfare, they dictate that the private companies do it directly. It’s deceptively simple and straightforward. Besides being insidious, it’s also counterproductive. Minimum wage laws do not decrease poverty, they actually increase it, probably more than any other single law.
You could have a job that pays $4 an hour where you learn something, develop good work habits, and increase your marketable skills, or you could have no job, earn zero dollars an hour, and have no chance make progress. The true “minimum wage” is not $7.25, it’s zero. The minimum wage doesn’t assure a “living wage,” rather it assures a job-killing wage.
Is a high school dropout with no work experience worth the minimum wage? Are all jobs (sweeping the shop floor, for example) worth the minimum wage? At a time when the nation is desperate for “job creation” the minimum wage is by far the worst job destroyer. Minimum wage laws effectively outlaw all jobs with less economic value than the minimum wage. Rather than appreciating the fact that there are millions of job situations in our economy, such laws apply the government’s typical, crude, one-size-fits-all approach.
Furthermore, when someone is paid $7.25 an hour, the total cost for the employer is considerably higher. Various payroll taxes and fringe benefits typically add another ten to twenty percent or more to the cost of hiring someone.
The private sector is based on voluntary exchange. Employers are not forced to hire a certain number of workers. If a worker adds less value than the minimum wage, an employer would lose money by hiring him. The fundamental problem is that some people have an insufficient value on the labor market. That is the problem we need to focus on if we want everyone to have a “living wage.” Reforming the dysfunctional public school system would be a good place to start. Minimum wage laws attack a symptom instead of its cause, another distinctive characteristic of liberalism.
So long as our economy relies primarily on voluntary exchange, so long as any individual freedom remains, reliance on force and coercion will have limited success. Self-interest, ingenuity, and individual initiative will largely frustrate the grandiose schemes of the control mongers. The fact that everyone does not simply and sheepishly acquiesce when force is applied is the leading explanation for “unintended consequences.” It is also why one law usually begets another.
Liberals have an abiding faith in the effectiveness of force and coercion. They aren’t the least bit hesitant to use force in achieving their goals. Obamacare is one gigantic application of force to our society and economy. Social Security forces every employed person to devote part of his income to a government-run pension plan.
Liberal politicians don’t even mind that minimum wage laws destroy jobs and create more poverty. More poverty simply provides them with more opportunities to do what they love to do, that is, increase the size and scope of government. The jobs destroyed by minimum wage laws just mean that more money needs to be spent on unemployment compensation, food stamps, and redundant job-training programs.
The government can pass a law defining a legal “minimum wage.” It cannot, however, pass a law defining the “equilibrium wage” (or the equilibrium price of anything). An equilibrium price is that price where the quantity supplied equals the quantity demanded, the price where the supply and demand curves intersect. It is the “market clearing” price, the price where there is no shortage or surplus.
A legislated price almost always results in a shortage or a surplus, depending on whether it’s set above or below the equilibrium price. Rent control laws are set below equilibrium rents, so the result is an apartment shortage. Minimum wage laws are usually above the equilibrium wage for low-skill, minimum experience workers. The result is a “surplus” or excess supply of such workers. In labor markets excess supply is called unemployment. Unemployment does far more harm to individuals and society than wages that are defined by someone as unfairly low. Shortages and surpluses represent frustrated voluntary exchange.
There are people who would like to work for $4 an hour, and there are employers who would like to hire them for that wage. However, for them to enter into such a transaction is a criminal act. Some far-away clueless politician has arbitrarily decided that $4 an hour is not fair and not enough to live on.
The clearest evidence for the damage done by the minimum wage laws is the unemployment rates for teenagers, particularly minority teenagers. Today the overall unemployment rate in the U.S. is 7.9 percent. For those 16-19, the rate is more than twice as high (20.8 percent) and for black teenagers the rate is more than four times as high (37.8 percent).
There is perhaps no law more popular and less questioned by liberals than minimum wage laws. Tell a liberal that you are opposed to minimum wage laws, and he or she will look at you as if you are a heartless ignoramus. I’ll bet you could not find a single liberal who has the least degree of doubt about the wisdom and effectiveness of minimum wage laws. Being in favor of minimum wage laws gives you the satisfaction of thinking you’ve done something good even if the actual results are harmful. Liberalism is about feeling good about yourself. It is public policy based on self-indulgence. In liberal never-never land, intentions are all that matter. Intentions are the be-all-and-end-all of public policy choices. Results be damned!
Minimum wage laws are so popular and such an ingrained public policy, even conservative politicians refrain from vigorously challenging them. That’s understandable but unfortunate. It’s not that hard to make the case against minimum wage. Such laws do significant and lasting damage. Running away from the debate is desertion in the heat of a very important battle. Minimum wage laws present a golden opportunity to explain the bankruptcy of liberalism.