The Minimum Wage Mirage
It would be nice if every worker were worth $9.80 an hour. But not all workers are.
Unemployment remains high; job growth is sluggish; and millions of Americans have given up hope of ever finding work. So how do creative legislators propose to generate new hiring? Easy: Make it more expensive.
That's right. In Congress and several states, some lawmakers want to increase the legally mandated minimum wage. They think employers should have to pay more for labor. They say it should be illegal to hire people who are willing to work cheap.
This amounts to a stubborn defiance of simple reality. A recession puts strong downward pressure on wages and salaries. A slow recovery has the same effect, only milder. It's an unfortunate consequence of a weak economy.
You can't blame anyone for wanting incomes to grow. But trying to achieve that in this manner is like trying to start a campfire by aiming a hose at a swimming pool.
Still, the idea has no shortage of fans. Some supporters think it should be increased to $9.80 an hour by 2014. Sen. Tom Harkin, D-Iowa, chairman of the labor committee, told The New York Times a raise would "help hard-working families make ends meet, join the middle class, and help move the economy forward."
New York Mayor Michael Bloomberg favors increasing his state's floor. Even Mitt Romney thinks the federal minimum wage should climb automatically with inflation.
No one will deny that the minimum wage provides for a meager income. Under the federal requirement of $7.25 an hour, a full-time worker earns just $15,080 a year. Illinois' $8.25 minimum wage yields an annual income of $17,160. The federal poverty level for a two-person family—say, a single mother and a child—is $15,130.
It would be nice if every worker were worth $9.80 an hour. But not all workers are. If you tell a company it has to pay $9.80 to someone who produces only $7.50 in value, the company may choose to pay that employee an even lower wage: zero.
That's one way a higher minimum destroys jobs. Another problem is that by increasing labor costs, the change would inevitably tip some companies from profitable to unprofitable. A fast-food restaurant that can stay afloat paying $7.25 an hour might sink under the weight of a 35 percent increase. Some businesses would disappear, taking their jobs with them.
It's a time-tested axiom of economics that when the government sets a minimum wage, it causes unemployment by pricing some workers—particularly marginal ones—out of the labor market.
David Neumark, an economist at the University of California, Irvine and co-author of the 2008 book "Minimum Wages," says a 10 percent boost in the minimum wage could be expected to reduce employment among low-skilled workers by 1 to 2 percent.
Supporters of the change insist that an increase would have no such effect, and a couple of studies support the claim. But if it's true, why stop at $9.80 an hour? Why not $19.80? Why not $99.80? Water won't run up a steep slope—but it also won't run up a gentle one.
Nor is it plausible to believe, as the National Employment Law Project does, that giving more money to workers would lift the economy because it "would give people more money to spend." It would do that by leaving other people less money to spend—either the business owners who would have to pay higher wages or the customers who would face higher prices. The total amount of money available for making purchases wouldn't change.
Supporters think raising the minimum wage is a good way to reduce poverty, but it's not. Neumark says only about 17 percent of minimum wage workers are in poor families. Many of the rest of are middle-class youngsters.
A better way to help workers at the bottom is already in place—the federal earned income tax credit, which supplements the earnings of low-income workers. A woman with one child earning the minimum wage in a full-time job can get an additional $3,169 per year from the tax credit. This approach has the distinct advantage of channeling extra money to the working poor—without turning some of them into the unemployed poor.
In trying to help those in need, avoiding certain harm to the intended beneficiaries is not too much to ask. In fact, it should be the minimum.
Steve Chapman blogs daily at newsblogs.chicagotribune.com/steve_chapman.
