Minimum Wage Incoherence

As of the beginning of 2015, twenty-one states raised their minimum wage levels, ranging from 15 cents an hour in Washington state to $1.25 in South Dakota, and liberals are celebrating. As Steven Pearlstein of the Washington Post sees it, and he imagines that almost everyone else agrees with him (no doubt because his views are sooo reasonable and correct), the increases serve “economic justice,” whatever that means (see here).

As Pearlstein points out, the economic case against the minimum wage is that an increase (above the value of what workers produce) reduces employment of low-skilled workers due to the “iron law” of downward sloping demand. This results in a misallocation of resources and lessens market efficiency (although Pearlstein doesn’t mention this point). But Pearlstein questions this conventional view, claiming there are “countless” studies showing that minimum wage laws have no or negligible effect on low-wage employment.

The evidence supporting minimum wage laws is not as convincing as Pearlstein and other liberals like to suggest. In fact, the opposite is true. In a 2006 survey of the new research beginning in the early 1990s, economists David Neumark and William Wascher found that

A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries.

But never mind. After ignoring this evidence, Pearlstein reviews how business owners might deal with an increase in the minimum wage. For example, fast-food restaurants may pass along much of the wage increase to consumers in the form of higher prices, which in turn would reduce sales and employment. Pearlstein points out, however, that consumers who don’t buy more costly Big Mac meals would instead buy more Kraft macaroni and cheese, so employment at Kraft would increase.

Employment at Kraft may increase, not to mention that employment at firms producing automated equipment would also increase as low-skilled workers lose their jobs when replaced by automated equipment. Overall employment levels may not change much, but the question is what happens to low-skilled workers. And it’s unlikely that equipment manufacturers, or even Kraft, would add low-skilled workers as demand for their products increases.

Pearlstein goes on to suggest that workers who don’t lose their jobs as the minimum wage increases would have more money that they would spend on goods and services produced by other low-skilled workers, thus maintaining employment levels. But when the wage increase is passed along in the form of higher prices, the extra money that low-skilled workers would receive comes from the pockets of consumers who could just as well spend that money in the same way. So this point adds nothing to Pearlstein’s argument.

According to Pearlstein, business owners who are unable to pass on the minimum wage increase to consumers might offset the increase by reducing pay for supervisors or other higher-paid workers. But this is delusional. Any business that reduces pay for workers to below market levels will quickly lose those employees to its competitors. Pearlstein also believes that increased pay would enhance worker productivity because, after all, increased pay works as an incentive for “bonus-laden” CEOs. This is simply more delusion because a minimum wage increase is not a bonus.

Surprisingly, Pearlstein neglects to tout the minimum wage as an effective antipoverty tool, something that liberals from FDR to Ted Kennedy have emphasized. But in this case, the omission is appropriate because the typical beneficiary of the minimum wage is a part-time worker who is not a member of a poor family or the head of a household. As Jason Riley points out in his book Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed:

Most poor families don’t have any workers. Raising the minimum wage does nothing for them, and to the extent that it reduces their employment opportunities, it’s a net negative. Reducing the number of entry-level jobs keeps people poor by limiting their ability to enter or remain in the workforce, where they have the opportunity to obtain the skills necessary to increase their productivity and pay, and ultimately improve their lives.

The minimum wage is not an effective antipoverty tool, so Pearlstein instead claims that the ultimate reason for raising the minimum wage is that “fairness matters.” Yes it does, but only a liberal would rely on “fairness” to justify government interference in the labor market that reduces entry-level jobs for those who especially need them (such as young African-American men) in favor of wage increases for middle class workers above the value of what they produce.

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