Monday, June 26, 2006

But It Feels Good

Every few years liberals trot out a proposal to raise the minimum wage. You see arguments in favor of it in the news media, similar to this one in today’s Standard Examiner, which argues that the current $5.15/hour is “measly.” Conservatives respond by pitching a fit, coming across as cold-hearted shills that are in the pockets of big business. Sometimes conservatives win out as they did last week, but eventually the minimum wage gets raised, even if it takes several years to achieve it. Why do we keep doing this same dance?

For liberals, raising the minimum wage is always a good election year tactic. It is easy to explain to voters. The compassionate voter in each of us, ever willing to be free with others’ money, sees it as the least we can do to help the working poor. Not only that, but it plays well to the unions that traditionally support liberals. While few union workers earn anything close to the minimum wage, unions know that every jump in the minimum wage flows into a jump in union wages across the board. This necessarily leads to inflation that eventually erodes the wage increases.

For conservatives, this is a horrible issue. It is difficult to explain both the economics and morality behind their stance against raising the minimum wage. And each time this comes up, some conservatives hurt their cause by suggesting that we are headed for cataclysmic economic problems if we raise the minimum wage. Of course, this has never happened in all of the times the minimum wage has been raised, so it hurts conservatives’ credibility.

But subtle economic changes have occurred every time the minimum wage has been raised. More on that later.

The Standard Examiner Editorial Board contends that raising the minimum wage is “a simple matter of fairness,” since Congress continually raises its own wages. Never mind the fact that the control of Senators’ and Representatives’ compensation is one of the responsibilities enumerated to Congress in Article I, Section 6 of the Constitution, while the document is completely silent on the right to regulate wages outside of government service.

Personally, I have a problem with all of the things we allow the federal government to control as “a simple matter of fairness,” when the Constitution does not specifically enumerate the right to do so. If we really think the federal government should regulate something beyond what is enumerated, we should get the gumption to amend the Constitution to reflect these values, rather than have the intent of the document eroded year after year by well-intentioned laws and regulations.

Sadly, these arguments are quite moot, since we have a long history of allowing the government to meddle where it is not permitted by the Constitution. (In fact, our federal elected officials spend so much time frolicking in these arenas that they have little time left for the hard issues with which the Constitution actually tasks them.) So, let’s look at economic issues.

The WSJ Editorial Board notes here that “Only a tiny fraction of Americans--perhaps 3% to 5%--get paid the current minimum of $5.15 an hour.” That is actually one of the reasons raising the minimum wage appeals to voters, because the price tag seems small.

But the WSJ Ed Board asks a cogent question: what is the motivation for raising the minimum wage? Ostensibly, the answer must be to reduce poverty. But, claims the board, “no one has ever demonstrated that raising the minimum wage reduces poverty.” The reason for this is that about 87% of minimum wage earners are not poor, as well as the resultant wage-eroding inflation mentioned above.

The board notes that most low wage earners live in multiple earner households that have a combined income far above poverty level. Many of these folks are teenagers working in entry-level jobs. “A significant number of them have high-income parents.” Raising the minimum wage actually makes it more difficult for our lowest skilled people (including teenagers) to get jobs, since it makes those jobs more attractive to more experienced workers. Mind you, this doesn’t happen in every market, but it impacts those on the margins.
“The implications are especially profound for poor and inner-city black kids. Starting at a disadvantage, they have the most to gain from an introduction to the world of work skills. They also face the most predictably bleak future if they miss this foothold.”
In other words, the people we aim to help by raising the minimum wage are actually hurt the most by the action. By mandating an increase in the minimum wage, we don’t help the broader poor and we don’t help the middle class, but we do hurt those that are most vulnerable. The WSJ Ed Board quotes University of Georgia and Cornell's Richard Burkhauser as saying, “What we are doing with a minimum-wage increase [is making sure] that for the folks who don't have the skills to be worth $7.25, they are not going to have a job.”

But, hey, it gives us a warm fuzzy. And this is what we call compassion?


Cameron said...

Wow. So what's the point of having a federally mandated minimum wage at all? Should it be abolished outright? Your logic seems to be headed in that direction....

Scott Hinrichs said...

The libertarian side of me will argue that the minimum wage serves no meaningful purpose, either economically or morally. The market effectively sets the price for labor. That is why there are so few jobs that actually pay the minimum wage.

The conservative side of me will argue that if we think a minimum wage is so darn important, let's amend the Constitution to officially allow Congress to regulate it.

Anonymous said...

The market does what it can get away with - not what is necessarily demanded of them. If the minimum wage was abolished and labor resources were plentiful, what would keep a business from paying them as little as possible? After all, a true corporation is designed to get gain by any means possible, thus maximizing the income of its shareholders.

It is because corporations are designed without a conscience that we need a minimum wage. Just take a trip down robber baron memory lane or, if you don't care for history, a trip through a Chinese factory would do the trick as well.

I understand your distaste for those evil lawmakers in Washington, but these laws are designed to protect the American public. It may be that only 3 – 5% of all Americans actually make $5.15 an hour. In fact, you make a good argument for not raising the minimum wage at all. But what would the “market” do if the minimum wage was done away with and the demand for labor was low? Would it be possible, then, that American workers currently earning $7.25 an hour could literally become a “dime a dozen?”

Scott Hinrichs said...

Demosthenes, you make some salient points, but the market is not fooled by setting a minimum wage. Raising the minimum wage pushes those on the margin out of the labor market. However, this effect is somewhat temporary, since broadspread wage inflation eventually results, meaning that over time $7.25 of labor comes to be worth what $5.15 labor used to be worth, thereby, allowing those at the margins back into the market.

So, taken in the long view, the minimum wage does nothing whatsoever, since the market eventually adjusts to render it meaningless. That is, it works that way until we price ourselves out of the market (such as they are doing in Western Europe). However, in the short term, raising the minimum wage hurts those its supporters say it will help. Some of these people end up on the public dole for the rest of their lives. Some end up in prison. How justified are we in cyclically harming those on the bottom rung so that we can feel good about ourselves?

You seem to mistake the robber barron era as simply a matter of economics. Rather, it was a matter of power -- and related corruption. The economics of low wages were a symptom, rather than a cause. Raising the minimum wage did not bring that era to an end; implementing anti-corruption reforms did. Nowhere am I arguing against reasonable anti-corruption regulation. But the presence or lack of presence of a minimum wage does not significantly impact corruption and resultant bad wage structures.

Bradley Ross said...

Very good discussion. When you say that 3-5% of the population works for minimum wage, do you mean that they are working for the federal minimum or the minimum in the state where they live?

Scott Hinrichs said...

I think, per the referenced article, that 3-5% make the federal minimum wage. The main discussion was related to Congress' debate of this issue.

Internet Esquire said...

Arguing as a libertarian, an expansion of the Earned Income Tax Credit would be a much more efficient and equitable way of helping the working poor than raising the minimum wage, and it can be justified because it reduces entitlement spending, provides a boost to a very inefficient sector of local economies, and increases labor work force participation.