Something for Nothing

January 11, 2007 | by | Topic: Economics & Political SystemsPrint Print

Guest Commentary

When something is offered to us for free, we become suspicious. Internet scams, all-expense paid vacations and interest-free loans all beg the question, “Where is the catch?” Read the fine print and the true cost becomes apparent.

Increasing the minimum wage works the same way. The details are in the fine print. After all, common sense tells us that you can’t get something for nothing. But what if you could get something just by changing the law?

On Wednesday, the U.S. House of Representatives, in one of the first legislative actions by the new Democratic Congress, voted to increase the federal minimum wage to $7.25 per hour. Such a move is likely to receive wide public support, as a recent Gallup/USA Today poll found that 86 percent of adults favor increasing the minimum wage.

Here in Pennsylvania the minimum wage was increased from $5.15 to $6.25 on January 1. For a person working full-time at the minimum, the increase amounts to about $2,000 annually—enough to measurably improve the standard of living for the working poor. The minimum will rise again on July 1 to $7.15 an hour.

But hold on a minute. If $7.15 an hour is better than $6.25 and $6.25 is better than $5.15 an hour, then surely we can do better than $7.15, right?

A minimum wage increase to $10 an hour would provide more purchasing power than $7.15, although very few politicians advocate such a drastic increase. And surely $20 an hour would lift a low-wage worker not only out of poverty but place them squarely amongst the middle class. But again, why stop there? A $50 minimum wage would move all wage earners into the top quintile—meaning we’d all be rich. Now that’s exciting.

Or is it? Recall the fine print. The disclaimer—what no one wants you to think about. A real minimum wage, one that measurably alters the welfare of the poor, will also cause the widespread loss of employment opportunities. How many of us are worth $50 an hour to an employer? A $50 minimum wage would shut down most of the economy. Any meaningful increase would have the same effect: widespread unemployment.

And what happens when people become unemployed? They want to know why they are out of work, and they read the fine print to figure out why. No politician wants you to read the disclaimer and learn that the minimum wage prices the least productive members of society out of the work force, so politicians do their best to make sure that the increases in the minimum wage are small and that they lag the real market wage. And since less than three percent of all workers in the country have jobs that pay the minimum, increasing that wage sounds impressive and comes with great political fanfare, but the economic implications are negligible.

I am not a fan of the political posturing that surrounds the minimum wage, but I don’t get too excited about it either. After all, I’ve read the fine print. The advocates in favor of increasing the minimum wage understand all too well that the “freebie” that they are offering comes with strings attached. They want you to believe that the working poor are getting something for nothing. Life doesn’t work that way. You get something by working hard and earning it. The best way to help low-skill workers is not to raise the minimum wage; it is to give them the tools necessary to escape poverty. This can be accomplished though additional training and education.

Poverty is an economic condition that occurs when the poor cannot find jobs or they lack the skills necessary to earn a living wage in the workforce. Both conditions are treatable without slight of hand and a disingenuous wage policy. We can, and should, do better by the poor here in Pennsylvania and throughout the country by treating the root cause of low wages instead of trying to alleviate the symptoms.

Dirk Mateer

Dirk Mateer

Dr. Dirk Mateer is a Senior Lecturer and Director of Undergraduate Studies in Economics at Penn State University and a contributing scholar with The Center for Vision & Values at Grove City College.

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