Minimum Wage Hikes Are Too Good To Be True

Despite high-flying promises, government can't decree the price of labor without killing jobs.

If you offer people something that is too good to be true, you will always find takers. Ask Bernie Madoff. Or ask Barack Obama. He recently proposed an increase in the minimum wage—an idea that suits the natural predilections of many people enough to distract them from the unsentimental and unwelcome logic of economics.

One poll found that 63 percent of Americans favor raising the federal floor from the current $7.25 to $10.10, as the president recommends doing over two years. The reasons are obvious. Wages have stagnated, low-income Americans are getting a smaller share of national income and many working people are stuck in poverty despite their best efforts. A higher minimum wage is the obvious solution.

Obvious, but wrong. The proposal rests on the assumption that the government can decree the price of a commodity—in this case, labor—in defiance of the dictates of the market, without ill effects. But that view requires a heroic suspension of disbelief.

When stores want to move slow-selling merchandise, they cut prices. When customers clamor for more of an item than sellers can provide, they raise prices. Lower prices result in higher demand, and higher prices do the opposite.

This is not exotic free-market dogma but elementary economics. Any CEO who proposed to boost sales by jacking up prices would see the company's stock price plummet in response to this lunacy.

But supporters of a higher minimum wage would have us believe that low-wage workers are magically exempt from these phenomena. They claim companies will employ just as many employees at $10.10 an hour as they do at $7.25.

But they must doubt their own case. Otherwise, they would propose an even higher amount, confident it will be irrelevant to hiring decisions. If a minimum wage of $20 or $30 an hour would cause layoffs, though, why wouldn't $10.10? At what point on the wage scale does the law of supply and demand take effect?

Even liberal hero Paul Krugman, a Nobel laureate in economics and columnist for The New York Times, has grudgingly acknowledged this reality. In his 1998 textbook, he wrote that "the centrist view is probably that minimum wages 'do,' in fact, reduce employment, but that the effects are small."

In the short run, McDonald's and KFC might have little choice but to keep staffing at current levels and cough up more on payday. But in the long run, employers would have a significant incentive to find ways to employ fewer workers—by automating tasks, moving to more self-service, demanding more of each employee, cutting back store hours or closing marginal outlets.

Among liberals who have reservations about free trade, the usual complaint is that U.S. companies will migrate to Mexico or Colombia to obtain cheap foreign labor. But if one company will pack up its assembly lines and move them thousands of miles to alien lands to reduce wage costs, why wouldn't another company redesign its operations here to do the same? Why would it passively accept a hit to its bottom line?

It's been argued that restaurants are likely to absorb the increase because they can't move abroad. True enough. But shutting down is always an option. A lot of fast-food outlets are only modestly profitable anyway. Burger King, Wendy's, KFC and Arby's closed more restaurants than they opened last year. Higher labor costs will mean even more vacant buildings—and fewer jobs.

It's true that the smaller the legislated increase the less the effect on hiring and firing. But less effect is not the same as zero effect. A small minimum wage boost would not cause a big increase in unemployment, but only because it would not produce a big increase in the earnings of the affected workers.

The plausible argument for the change is that the benefit to these workers is large enough to outweigh the effects on the newly unemployed. But even that claim is tenuous. A study by economists Joseph Sabia of American University and Richard Burkhauser of Cornell found that "minimum wage increases between 2003 and 2007 had no effect on state poverty rates."

In the picture painted by Obama and congressional Democrats, raising the minimum wage is an unmixed blessing, helping some people while harming no one. If you believe that, the next Bernie Madoff is out there, and with any luck he'll find you.

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  • CJR||

    "...and many working people are stuck in poverty despite their best efforts."

    Having known a few people mired in long-term poverty, I wonder about this. Has any study found a correlation between increases in the minimum wage, and reductions in the poverty level?

    Oh, wait. "...Minimum wage increases between 2003 and 2007 had no effect on state poverty rates."

  • RishJoMo||

    lol, Corporae America will never let that happen, ever,

    www.AnonGoes.tk

  • CatoTheElder||

    Anything to change the subject from ObamaCare.

    Minwage is former CEA chairman Alan Krueger's claim to fame. The only surprising thing is that minwage has just now become the topic du jour now that Krueger is gone. (He left CEA for academia in August.)

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  • wareagle||

    I wonder how much support we'll see from those backing an increase in the minimum when govt decides it has to power to enforce a maximum wage, too. After all, no one "needs" that much money, do they?

    If only there were ways through which people could learn new skills that would make them marketable beyond the entry-level. In the end, this is sounding parallel to O-care: much of the health care bill is aimed at making sure the dozens with chronic and expensive conditions are not left out of the insurance market. The minimum wage thing is aimed at, what, 4% of the population, most of whom are under 21?

  • Ted S.||

    Oh, there are people stupid enough to believe in a "maximum wage".

  • ||

    True, but the people responsible for passing the laws would all be significantly harmed by a maximum wage, whereas they do not produce any goods for which labor is an input cost, so the minimum wage has no effect on them, except to buy the votes of the stupid.

  • Ted S.||

    True, but the people responsible for passing the laws would all be significantly harmed by a maximum wage,

    AHAHAHAHAHAHA!!!!!

    They'd figure out loopholes around it.

  • Knarf Yenrab (prev. An0nB0t)||

    Several of the US's Glorious Leaders from The Greatest Generation! believed such. Despite the whitewash treatment given their fiscal policies by historians and economists, we know how that story ends.

  • d_remington||

    It's not that far a jump if you're stupid enough to believe in a 'minimum wage'.

  • thom||

    The country effectively had a maximum wage in the 1950s when marginal tax rates were 90% for the 1% and the economy boomed the entire time. /prog

  • Free Society||

    If ever a person needed to hear the expression: correlation does not equal causation, it's a progressive describing the economic benefits of government plundering.

  • ||

    They harp on the 90% thing so much it makes me suspicious.

    I bet you anything that few people actually that amount.

    Lefties also seem to drum up the 50s as an economic golden age but it was actually pretty volatile.

  • ||

    'paid that amount.'

    How the heck I'm missing whole words in my sentences I don't know.

  • The Original Jason||

    There was a maximum wage under FDR… companies got around this by offering benefits like health insurance...

  • Knarf Yenrab (prev. An0nB0t)||

    x100

    The only reason why health insurance is so problematic in modern America is due to progressive-era interference in labor and healthcare markets.

  • TexLawyer||

    This part of your argument is tenuous:

    "But in the long run, employers would have a significant incentive to find ways to employ fewer workers—by automating tasks, moving to more self-service, demanding more of each employee, cutting back store hours or closing marginal outlets."

    because employers have an incentive to do all of this anyway if it would make them more money.

  • BakedPenguin||

    $7.25 to $10.10 is close to a 40% increase. It's $5,700 a year for a full time worker. That's a lot of added incentive, especially for some place with several workers at minimum wage.

  • wareagle||

    the discussion also consistently ignores those who fall between $7.25 and $10/hr. Simply raising them to $10, too, seems the definition of unfairness. But that's what happens when people emote rather than think. Not talking about you, but supporters of hiking the minimum.

  • UnCivilServant||

    Back when I had a job at close to the minimum wage (I think I was making $6.42 at the time, I was also in school) there was a hike which didn't quite bring it up to where I was. My employer simply compressed the low end of the pay scale, reducing the rate bands to about two or three cent increments so that the top of the low end didn't change. There was a great deal of resentment and grumbling from those who'd worked their way up the scale towards those who'd been bumped by the legislature. The general opinion being that it devalued our work.

    No one blamed our employer, surprisingly.

  • ||

    This is something that the left likes to hide. Wage hikes contribute to income inequality and the abysmal state of higher education in this nation.

    Laborers making $15/hr. looks better when the minimum wage is $7/hr. than they do when it is $15/hr. It's not hard to imagine that a $15/hr. laborer needs an associates degree plus experience to get to a $15/hr. wage while the guys working at BK, getting a 40% minimum wage increase, dropped out of HS.

    On top of that, this difference is not felt as deeply to someone making $30/hr. as it is to someone making $15/hr. and is insignificant to someone making $300/hr.

    Moreover, the part of the economy that runs on goods and services is slowed when the interchange costs of producing and moving those goods and services goes up. Those that make money via independent mechanisms aren't effectively slowed and even make relative profits on the differences in market speeds. The mechanic has to work more hours, pay more for parts, and pay his employees more; the banker on the other hand, has to pay his employees more, but they make larger loans for goods and services.

    Poor people are poor because they can't afford rising prices on goods an services (or the employees that produce them). Rich people are rich because they can afford price hikes and have assets to reallocate to make price hikes profitable. Mom and Pop will go bankrupt paying their employees $10/hr. faster than Walmart will.

  • ||

    Also, when I started working, min. wage was $3.15, by the time I got a 'skilled' position it was $4.25, and when I got to making $10/hr. withholdings were pushing it back towards minimum wage.

    Once I got a degree, a career, and real income all of this went away. Unfortunately, I don't think it will happen that way for my children.

  • ||

    "because employers have an incentive to do all of this anyway if it would make them more money."

    The incentive is profit. If the cost of labor is lower than the cost of automation, then it makes no sense to automate. I couldn't cite an example, but I'm sure there's employment in some industry affected by this; the current increase in minimum wage might be that tipping point that would force companies to automate in order to stay profitable.

  • #||

    A great example is the use of self check out lines at grocery stores following all the min wage increases that were put in around 2008-09.

    Automation now looked more attractive when labor was forced to become mooe expensive.

  • H. ReardEn||

    ...because employers have an incentive to do all of this anyway if it would make them more money.

    Of course business owners are motivated by profit. But why would you believe that the artificially increased cost of labor would not have an effect on its demand? Or that increased costs would not motivate employers to seek out alternatives?

    Despite my own experience, one would expect a lawyer to have a little more sense.

  • Invisible Finger||

    You do realize that almost everyone in Congress is a lawyer, right?

  • ||

    At a certain price, labor is a very efficient capital good. At a certain price, labor is no longer an efficient capital good. Your grasp of the issue is tenuous; the logical construction is not.

  • Knarf Yenrab (prev. An0nB0t)||

    You run a fast-food franchise, where you pay $3000 a month for the minimum-wage cashiers to ring up customers. Were you to automate, the total cost including financing the expensive computerized setup would be $3200 a month. You don't automate because you'd rather have the extra $200 in profit while waiting for the price of automation to drop below the price of labor.

    Now a federal minimum-wage increase strikes, and your cost for human cashiers becomes $4000 a month. Do you now have greater incentive to automate, despite the fact that the price of automation hasn't dropped, but rather the cost of labor has risen?

  • ||

    You have an incentive but your profits remain the same. All you've done is prevent a dramatic increase in costs.

    I think it would be a mistake to think because you've automated to believe that $800 "savings" is profits. It's just that, saving you from increased costs.

    In a way, it still cost you your $200 profit.

  • Knarf Yenrab (prev. An0nB0t)||

    You have an incentive but your profits remain the same. All you've done is prevent a dramatic increase in costs.

    But your profits are dependent on your costs, which you're always trying to minimize. Like most of the fart-fencing that passes for modern economic debate, it's a matter of perspective (the source of all economic fallacies, many of which dominate the NYT).

    Having a minimum wage at all would increase costs and encourage automation, as would artificial increases in cost in the price of beef or subsidies in the cost of grain used to produce buns or the beef. It's government interference all the way down, but we're just isolating a particular interference and determining its effect. We could do the same with corn subsidies or tarrifs, but

  • #||

    When the relative cost of something goes up (labor) then the alternative becomes more attractive (automation). As the min wage keeps increasing, more and more tasks become viable to automate.

  • Sevo||

    ..."because employers have an incentive to do all of this anyway if it would make them more money."...

    Absolutely true, and raising the MW means labor just became a prime candidate for cost reduction.

  • BakedPenguin||

    In the picture painted by Obama and congressional Democrats, raising the minimum wage is an unmixed blessing, helping some people while harming no one.

    It is an unmixed blessing to Democrats. They get to take credit for the wage rise, and blame any resulting job losses on greedy, greedy capitalisms.

  • ||

    They get to take credit for the wage rise, and blame any resulting job losses on greedy, greedy capitalisms.

    Price increases as well, since minimum wage laws, like all price floors, are inflationary.

  • Knarf Yenrab (prev. An0nB0t)||

    It's a populist gesture that's good for any politician who makes his living off of the welfare state. Some of the poor make more money, the economically illiterate hoi polloi (including about half of academic economists) sing your praises, unions are better off as a consequence of the state crippling their low-wage competitors, and the now-unemployed poor who are fired from their jobs vote for the politician who offers the most handouts while blaming the greedy business owner for the loss of employment. Win win win win.

  • 2ndClassProle||

    Minimum wage increases just a hidden tax for the politicians with increase on both sides employer/employee FICA taxes. Also, with consumer goods going up also raises more revenue on sales taxes, but hey it is all in the name of altruism. So, why not.

    I say, too, that as a machinist making 16 dollars an hour my buying power will decrease.

  • ||

    my buying power will decrease.

    Impossible! Creating 5 trillion dollars in new money hasn't created any trace of inflation, why would a paltry increase in the labor price floor?

  • jmg09||

    Don't forget, another way of dealing with minimum wage increases is wages get "squeezed". For instance, if an employer can pay his new hires $5.00/hour, he may be able to reward his high quality, long term employees with $15.00/hour. When the employer is forced to raise the entry level employee to $10.00 he can no longer afford to reward his reliable employees, squeezing the top employees down to $12/hour.

    How's that for ending the "income gap".

  • ReadyKilowatt||

    Minimum wage increases are politicians throwing a bone to the unions:

    http://online.wsj.com/news/art.....1000422454 (paywall, sorry)

    http://dailycaller.com/2013/02.....imum-wage/ (no paywall)

    Some contracts will adjust the wage scales up automatically if the minimum wage increases, while others call for a renegotiation of the wage section of the contract (or the whole contract).

    And as the above opinion piece points out, there's the real elimination of competition on the low end because people who just want to gain experience will have a harder time getting their foot in the door if there's fewer low-wage jobs available.

  • Gilbert Martin||

    "The proposal rests on the assumption that the government can decree the price of a commodity—in this case, labor—in defiance of the dictates of the market, without ill effects. But that view requires a heroic suspension of disbelief."

    Or deliberate mendacity.

    Don't forget that it is labor unions such as the SEIU that are behind a lot of the push for this.

    There are union wages that are contractually tied to the minimum wage in such a way that would automatically ratchet up union pay rates if the minimum wage is increased.

  • Gilbert Martin||

    RK beat me to the punch.

  • thom||

    When customers clamor for more of an item than sellers can provide, they raise prices. Lower prices result in higher demand quantity demanded, and higher prices do the opposite.

  • Response||

    Minimum wage increases no longer have anything to do with elevating the poor. In fact the higher you raise the minimum wage, the more you increase the number of people living on minimum wage. At which point the liberals (*cough* socialists *cough*) will decry the current minimum wage as the reason so many are poor. Then they will wage war against the rich and force congress to raise the minimum wage again. So that even more people are working at minimum wage jobs. Rinse and repeat. If given enough time, it's both brilliant strategy and tactics to obtain their socialist (*cough* communist *cough*) dreams of ridding the world of wealth.

    Yes, I really wish I could do something about that cough.

  • Black Liberty Unchained||

    But But But a rising tide lifts all boats! If minimum wage increases people can buy more stuff stimulating the economy. Big Macs will only increase by a few cents!

    /progtard

  • gimmeasammich||

    Or the cheaper stuff will just go away, like the $5 Footlongs from Subway in San Francisco.

    http://www.nbcbayarea.com/news.....09445.html

  • Paul.||

    rests on the assumption that the government can decree the price of a commodity—in this case, labor—in defiance of the dictates of the market, without ill effects. But that view requires a heroic suspension of disbelief.

    Everything I know about economics I learned from the Lone Biker of the Apocalypse: Price, it's not what you say it is, it's what the market will bear.

  • Johnimo||

    "It's been argued that restaurants are likely to absorb the increase because they can't move abroad. True enough." Au contraire! What on earth makes anyone believe that restaurants can't move abroad? Just as production facilities can be moved outside the US, so can the service industries (restaurants) that are supported by the workers in those factories. To perpetuate the myth that restaurants can't move abroad is a silly concession to the arguments of the left.

  • Sugarsail||

    Actually, if you look at history, what usually happens when there is a minimum wage hike isn't layoffs or a lack of hiring but that prices rise as the additional costs incurred by businesses get passed on to the consumer...inflation. This immediately negates the benefit of the minimum wage hike since the cost of most things minimum wage workers buy often depend on low wage labor as well. If hiking minimum wage actually ended poverty, we'd not have any poverty left, since it's been hiked so many times already.

  • Duelles||

    Agree with the basics of the article and the basics of economics as applied to the minimum wage. However there are elastic and inelastic demand/supply situations that are sort of exceptions. Minimum wage is not an exception as I can attest as a small remodeling contractor and employer for 30 years. If I guy can't make money for me, I cut him loose.

  • Eeyore||

    What I learned is that we don't want those jobs anyway, because they aren't fun jobs. The people who can only do those jobs are only useful as constituents of the party.

  • Reason Able||

    Your column assumes that basic supply demand economics will work with wages. This assumes transparency of prices (in this case wages) and performance (in this case the effectiveness of the worker).
    Let's take the example of Furby. When Furby was in high demand during Christmas, merchants sold it for a high price. But anyone who wanted to buy a Furby knew what it could do and what the acceptable price is and calculates how much premium they are willing to pay. Similarly the seller of Furby knew what the standard price was and could check what others were charging for the product at that time.

    I agree with getting rid of minimum wage if transparency of wage is mandated. That is a job seeker should easily be able to find out what the local McDonalds, Taco bell, Wendy's, and say TJ Maxx's wages are. Then the lieklihood is the good workers will migrate to the one that pays the highest. This will force the others to raise their wages to attract good workers or be stuck with the lousy ones. My guess is transparency will be accepted by workers but not corporations. Actually minimum wage in some ways hurt the best and most effective workers because they get the same "minimum wage" as others who are less effective.

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