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Government's Helping Hand also Hurtsby
John Santoliquido Jul 5, 2007 Lest it go unnoticed, the federal minimum wage is set to increase. The minimum
wage hike was tucked into the war supplemental bill, which the president recently
signed into law, and will be implemented in three stages, concluding at $7.25 an hour.
Irrespective of battlefield outcomes abroad, it seems the fight against economic
illiteracy at home is a battle that is never won.
One wonders why a minimum wage increase must be staggered and delayed if it is
the cure-all its proponents portray it to be. The standard rebuttal is employers need
time to adjust. But then the need for adjustment implies that the policy is hardly all
benefit and no cost.
As with everything in a world of scarce resources, there are tradeoffs and opportunity
costs to an increase in the minimum wage. For employers, this means they will have
fewer resources to devote to the non-labor aspects of their business. This could
decrease their output, lower their sales, and reduce their income. On the other hand,
higher labor costs are an incentive to introduce new labor-saving measures such as
mechanizing the tasks previously accomplished by employees. Doing so often
increases productivity, thereby lowering costs and reducing prices, which increases
the purchasing power of consumers.
Benefits to producers and consumers frequently accompany increases in the minimum
wage, but fewer gains are experienced by the low-end workers whom an increase in
the minimum wage is supposed to benefit directly. To be sure, some are helped as
they see their incomes rise, but many more are harmed.
University of California – Irvine economist David Neumark has found that for every
10% increase in the minimum wage, the poverty rate increased by ¾ of 1%. The wage
increase from $5.15 to $7.25 is a 41% jump, meaning there could be measurable
adverse impacts on the poverty rate. In a 2005 study, Neumark concluded that
“although minimum wages increase the incomes of some poor families, the evidence
indicates that their overall net effect is, if anything, to increase the proportions of
families with incomes below or near the poverty line.”
This makes sense. An increase in the cost of labor causes employers to reduce their
demand for labor. In the case of the minimum wage, it is low-end labor that takes the
hit.
These workers lose their jobs, have their hours reduced, or face the elimination of
new employment opportunities. The third outcome is arguably the worst as it raises
the bar for entry (or reentry) into the labor market for those most in need of work and
experience. Increasing the minimum wage effectively takes the lowest rung on the
proverbial ladder of success and sets it higher off the ground. A 1999 study by John
Abowd, Francis Kramarz, and David Margolis examined movements in both the
French and American minimum wages and found that a 1% increase in the real (i.e.,
adjusted for inflation) French minimum wage rate reduced the future employment
probability of a man presently employed at the minimum wage by 1.3% (1.0% for a
woman).
The negative consequences of raising the minimum wage seldom make the news, but
they are all too prevalent and outweigh the advantages achieved. The young and the
inexperienced are priced out of the job market, and their plight gets lost in the
politics.
Depending on how much credit one gives to the intellectual savvy of lawmakers, the
members of Congress who support increasing the minimum wage either don’t
understand the economic impact of doing so, or understand it all too well. They can
take credit now for a feel-good policy and the instances of success it produces, and
then they can take care of those who are disadvantaged by the wage hike by
promoting a whole new set of welfare and job-training legislation. Add to that the
consolidated hold of the votes and money of the unions, whose pay scales are tied to
the minimum wage, and increasing the rate has no significant political downside.
Airing the economic casualties of government intervention does not serve the
purposes of expanding the state or perpetuating political careers, and so it does not
occur. And because the mindset of big government prevails in America’s education
establishment – our classrooms are case studies on the inferior fruits of monopoly –
successive generations are never taught the harm of government help. Socialism is
fueled by less information and intelligence, not more.
The battles that don’t require bullets can be as difficult as those that do. Efforts to
educate about the minimum wage are the requisite salvoes to reverse economic losses
and promote economic opportunity for those who need it most. The good news is that
time is on our side: without further intervention, natural inflation and an absence of
further rate increases would eliminate the pernicious effects of the minimum wage by
giving employers more hiring flexibility and by providing more job opportunities.
There is no guarantee this will come to pass so neatly, though. It may require a fight.
About the Author
Santoliquido is a Policy Associate with the 362,000-member National Taxpayers Union, a non-profit, non-partisan citizen group working for lower taxes and smaller government. |
