The Push For a Higher Minimum Wage Ignores Economic Reality
President Barack Obama and Democrats in Congress want to raise
the minimum wage to improve the lot of the working poor. But
they’ve got the wrong idea. The problem is not that these workers
earn so little; it’s that the things they buy cost so much. I
propose instead to outlaw high prices.
No one, after all, likes paying too much. So let’s put a stop to
it. Gas is too expensive? Make it $2 a gallon, max. Bread and meat
take a big bite out of the family budget? Poor people could eat
better if they had to pay only $1 a loaf and $1 a pound.
Clothing, footwear, cars, you name itâ€”if the government held
their cost down, life would be more affordable for low-income
In his State of the Union address, the president said, “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
federal minimum wage to $9 an hour.” He might just as well say that
no one should have to spend too much of their income on essentials.
So why not limit the cost of those essentials?
Those acquainted with the laws of economics will immediately
spot the flaw with my idea. When the price of something falls,
demand for it rises, but supply does not. If you tell oil companies
what they can charge for gasoline, they will reduce the amount they
sell, creating shortages.
Likewise, if you put a price ceiling on bread and milk, or
shirts and shoes, consumers will buy more of them, but stores will
stock less of themâ€”or, if the price is low enough, none.
We all know we’re more likely to go shopping when there’s a big
sale going on. Retailers don’t try to entice customers by
announcing price increases. The more expensive something is, the
less people will buy.
But those pushing for a higher minimum wage pretend that labor
is an exception to the rule. The administration can point to a few
economists who claim to show that raising the minimum wage doesn’t
raise unemployment among low-paid workers. Dean Baker and John
Schmitt of the Center for Economic and Policy Research in
Washington insist that when employers are forced to pay higher
wages, they reap large benefits, in the form of higher productivity
and lower turnover.
This is the liberal equivalent of the conservative belief that
tax cuts always pay for themselves. Anything so ideologically
convenient just has to be true.
But if businesses came out ahead by increasing pay at the
bottom, they wouldn’t have to be forced into it. They would act on
their own, in the relentless pursuit of profits. Instead, many
employers have calculatedâ€”based on real-world experience meeting
payrolls and competing with rivalsâ€”that higher pay for entry-level
workers is not a free lunch.
Raising the minimum wage may indeed raise average worker
productivity — not by inducing existing workers to work harder or
smarter, but by inducing companies to get rid of less productive
workers. If you raise the floor from $7.25 an hour to $9, employees
whose work output is less than $9 an hour will be let go.
Saying that a higher minimum wage would increase productivity is
like saying that banning anyone under 6-foot-10 will make NBA
players taller. It will, but not because anyone will grow.
Even the famously liberal Nobel laureate economist Paul Krugman
has pointed out these realities. On the blog EconLog, economist
David Henderson of Stanford’s Hoover Institution cites a 1998
article in which Krugman ridiculed those who “very much want to
believe that the price of labor — unlike that of gasoline, or
Manhattan apartments — can be set based on considerations of
justice, not supply and demand, without unpleasant side
Obama argues for an increase by saying no one who works full
time should remain poor. One fact he doesn’t mention is that the
great majority of people who earn the minimum wage are not poor.
More often, they’re middle-class teenagers.
Another likelihood, which he denies, is that while some workers
will go from $7.25 an hour to $9 an hour, others will go from $7.25
an hour to zero. They won’t be poor despite working full time.
They’ll be poor because they’re unemployed.
Maybe this won’t happen because the laws of supply and demand
will be suspended. But would you want to bet your job on it?