Election years are the times that try economists’ souls. Practically everyone with his hat in the ring will promise us this and promise us that and promise us everything under the sun, more often than not implying that, by the power of their word, they can suspend economic law.
Most recently we have the now regular call to increase the minimum wage as an important tool to help the poor. It is maddening that politicians who have graduate degrees should proceed with such economic foolishness, but, ‘tis the season to promise everything to everyone. John Kerry is calling for an increase up to $7 an hour. Bush’s people have responded that the President is willing to consider any reasonable increase. Because, alas, it appears that economic ignorance, like the poor, will always be with us, let us once again review the damaging consequences of increasing the minimum wage.
Those who claim that an increase in the minimum wage will help the working poor should have the decency to tell the full story. An increase in the minimum wage will help only some poor people at the expense of others. If the price of any good increases, people will want to buy less. This is true for gasoline. It is true for apples. It is true for compact disks. It is also true for labor services.
Employers cannot simply pay any old wage that makes workers happy. Businesses are constrained by the value that the workers add to the firm. If a worker’s contribution to the firm is such that his output brings in revenue of $5 for every hour of his output, the business cannot afford to pay him any more than that and still break even. If he is forced to pay this employee $7 an hour, he is losing $2 an hour every hour that worker is employed. That worker will soon be on his way out the door, most likely cursing his employer instead of the government mandated minimum wage. The direct result of a minimum wage above the market wage is mass unemployment for relatively less skilled workers. The number of workers who want to work increases, but the quantity of laborers that employers can afford to hire falls. The result is more people wanting to work at the minimum wage than can get hired. In other words, we get unemployment.
The bad news does not stop here, however. Those who are either laid-off or not hired to begin with are not shunned by employers because they are chock full of employable characteristics. They are left without work, precisely because they do not have the skills that allow them to contribute more to the firm and consequently earn a higher wage. These really are the working poor. It is hard to see how taking someone who is poor and working and help them by making them poor and not working.
Not only does the minimum wage harm the poorest of the working poor immediately, but it also sets them on a lower income trajectory over their lifetime. Many of the skills making them attractive to employers in the future are those disciplines learned on the job. If unskilled workers are denied opportunity to develop their skills because they cannot get a job to begin with because of a minimum wage set higher than the market wage, they are not helped in the least. They are hurt by the minimum wage and that hurt takes awhile to go away.
These conclusions are not ivory tower theories by economists infatuated with free labor markets. Richard K. Vedder and Lowell E. Gallaway, labor market experts at Ohio University, have produced much empirical work revealing that increasing the minimum wage does not reduce poverty on the national level, nor do state minimum wages reduce poverty in those states whose minimum wage is above the national. In fact, their work indicates that the strong economic relationship is between unemployment and poverty. Because the minimum wage causes unemployment, it should not surprise us that increasing minimum the minimum wage has not decreased poverty in the United States.
Politicians are not God. They cannot suspend the laws of economics any more than they can suspend the law of gravity. If we really want to help the poor, we should eject obstacles to their employment, not erect them. Busy and Kerry should be talking about abolishing the minimum wage, but neither praising it nor raising it.