Four Progressive Minimum Wage Myths Debunked
Democrats are just making things up to advance their job-killing cause.
Progressives have gone crazy over the minimum wage.
President Obama got the ball rolling when he called for hiking the federal minimum wage from $7.25 to $10.10 per
hour. Now, both Democratic presidential candidates are trying to one-up him, with Bernie Sanders demanding a $15 federal wage and Hillary Clinton $12. Meanwhile, California and New York have already passed laws mandating the Bernie rate, and scores of cities across the country are clamoring to follow suit.
And all the while, minimum wage advocates are making increasingly fanciful claims on behalf of their beloved laws.
The left's minimum wage obsession dovetails with a shifting academic consensus that until the 1990s considered such hikes a recipe for killing jobs, especially for low-skilled workers. For a long time, the generally accepted rule of thumb was that, all else remaining equal, every 10 percent increase in the minimum wage would decrease low-skilled employment by 1 to 2 percent, since the more employers had to pay these employees, the fewer jobs they could afford to provide.
This consensus began to fray with a 1992 study by economists David Card and Alan Kreuger, who found that New Jersey's minimum wage hike—from $4.25 to $5.05—did not lead to expected job losses in the state's fast food restaurants. This finding has been hotly contested, but even if it were true, it doesn't mean there are no other downsides to minimum wage laws. For example, sometimes employers don't respond to minimum wage hikes by laying off workers, but instead by raising prices for consumers. (Minimum wage opponents haven't helped their case by hitching it almost exclusively to job losses while ignoring the other, equally pernicious, adjustment responses by businesses.)
There is only one scenario, according to Naval Postgraduate School economist David Henderson, under which a modest legally mandated minimum wage might do more good than harm: when employers enjoy monopsony power (a monopoly on the buying side) in the labor market, either because there are very few of them or because workers can't leave for some reason. Employers then have a relatively free hand to hold wages down. A mandated minimum wage under those circumstances merely diverts the firm's "excess profits" to the worker, something that would have happened automatically in a more competitive market. But it doesn't diminish a company's productivity or its incentive for additional hiring—thereby actually boosting job growth. But genuine monopsony isn't common and would require a very finely calibrated and skillfully crafted minimum wage, which is not how blanket policies work in the real world.
America's federal minimum wage of $7.25 per hour works out to about 42 percent of its $17.40 hourly median wage. Even the most gung-ho academics only advocate raising it to 50 percent of the median — which means a little over $8.70. This in itself is a crude benchmark that lumps together high-wage service occupations with low-wage construction and other non-service ones whose market realities are completely different. Be that as it may, it is inconceivable that a $15 minimum wage—equal to 86 percent of America's median wage, and the highest in the Western world—wouldn't kill jobs, especially in small towns and cities where wages tend to be lower. Witness the chronic double-digit unemployment rate that a far less insane minimum wage has generated in France, Spain, Belgium, and other European countries.
And yet, minimum wage enthusiasts are abandoning all caution and making increasingly extravagant claims. Here are four of their sillier arguments:
False: Minimum wage hikes will lead to productivity-boosting automation
The standard rap against minimum wage laws is that by raising the cost of hiring workers, they prompt companies to invest in labor-saving technologies, throwing people out of work. But Matthew Yglesias claims that this would by no means be a "bad thing." Why? Because productivity is the engine of economic progress. And if machines are more productive than people, then policies that prod employers to replace people with machines would mean more wealth without toil for everyone. This is the reverse of the Luddite fallacy that seeks to boost jobs by eschewing labor-saving technologies. Nobel laureate Milton Friedman once heard a Third World bureaucrat, suffering from this fallacy, defend his decision to have poor workers dig a massive canal with shovels rather than earth movers because that meant more jobs. Friedman asked: Why don't you replace their shovels with spoons?
Increasing productivity is not simply a matter of increasing output, but doing so in the most cost-effective way. You do not encourage that with policies that force investments in capital equipment when labor is plentiful. Indeed, this raises the overall opportunity cost, rendering an economy less efficient. If Friedman were alive, he may well have asked Yglesias why, by his logic, he doesn't just advocate a ban on all manual labor.
False: Minimum wage hikes helps firms make more money
This claim strains credulity. How would a $15 mandate that almost doubles a company's labor costs actually boost profits? The argument that former Labor Secretary Robert Reich offers is that higher wages means happier employees and lower turnover, something that saves a company money. If so, the million-dollar question is why aren't greedy companies doing this already? Are they too stupid or sadistic or both to pass up on a win-win deal for both themselves and their workers?
False: Minimum wage hikes will stimulate the economy
Michael Reich, an economist at the University of California, Berkeley, claims not only that a $15 minimum wage wouldn't produce job losses in the short run, but would actually stimulate the economy, resulting in job gains in the long run. "They'd (employees) have more money to spend, the overall level of demand for goods and services would be higher, and so would the level of employment," he claims.
But shifting wealth around doesn't generate real economic growth. Boosting productivity does. Indeed, ordering employers to give artificial raises means that they would have less money to spend or invest, cancelling out any extra spending by workers.
False: Minimum wage hikes will diminish the strain on welfare programs
Advocates of the minimum wage claim that without a suitably high minimum, low-income workers are forced to rely on food stamps and health care programs to make ends meet. In essence, they argue, welfare programs end up subsidizing McDonald's low-wage workforce, which is hardly fair to taxpayers. Forcing companies to pay something resembling "living" wages would diminish low-wage workers' dependence on government programs.
This assumes that boosting the minimum wage would hand more workers a raise than it would throw people out of work, of course — which is hardly a reasonable assumption, as pointed out earlier. Indeed, notes University of California, Irvine's David Neumark, the probability that a family will escape poverty due to higher wages will be offset by the probability that another will enter poverty because it has been priced out of the labor market.
The core fallacy in this line of reasoning is that employers can set wages based on employee needs rather than market forces. Hence, they can simply be forced to hand over more money to their workers. That, however, is not how things work, especially in a globalized world where forcing employers to cough up wages higher than the market can bear would undermine their competitiveness—not something that helps anyone in the long run.
This article originally appeared in The Week.