Should the Minimum Wage Be Increased?

by Jun 8, 2012Liberty & Economy0 comments

There is no magic formula for economic growth. We have to learn to live within our means. No printing press or forced transfer of wealth will increase society’s standard of living.

Unsurprisingly, there’s a new push to raise the minimum wage in the U.S. The New York Times reports:

Representative Jesse L. Jackson Jr. tried to give new vitality to the issue of the federal minimum wage on Wednesday, coming at the debate with a fresh angle: that raising it might encourage Americans to spend more and, thus, help stimulate the nation’s struggling economy.

At a Capitol Hill news conference, he said the economy would be bolstered by increasing “the purchasing power of millions of low-income and low-wage workers, and one proven and effective way of doing that is to raise the federal minimum wage.” He has introduced a bill that would immediately increase the minimum wage by $2.75, to $10 an hour from $7.25….

“We’ve bailed out banks, we’ve bailed out corporations, we’ve bailed out Wall Street, we’ve tried to create sound fundamentals in the economy,” Mr. Jackson, Democrat of Illinois, said. “Now it’s time to bail out working people who work hard every day and they still only make $7.25. The only way to do that is to raise the minimum wage.”

An increase in the federal minimum wage was last approved in 2007, when Congress voted to raise it from to $7.25 from $5.15 over two years. Eighteen states now have minimum wages in place that exceed the federal minimum.

Mr. Jackson speaks of bank bailouts, arguing that since we bailed out banks, we should also bail out workers with a mandated wage increase. What a “bailout” means is taking money from one group by force and giving it to another. What about the option of ceasing such forced wealth transfers in violation of property rights altogether? How about just stop stealing money from the poor and middle classes and giving it to wealthy bankers in the first place?

Mr. Jackson’s argument is a fallacy. We’ll come to that, but first, the Times offers the best argument for increasing the minimum wage:

At face value the federal minimum wage is the highest ever, but proponents of raising it argue that past minimum wages should be considered as adjusted for inflation. That would make 1968, when the minimum wage was nominally $1.60, the highest, at roughly $10 an hour in 2012 dollars.

So the problem is that inflation is robbing people of their purchasing power and wage increases always lag behind the price increases that follow from running the printing presses. The problem is that you can print all the money you want, but you can’t print wealth.

But if inflation is stealing wealth from workers, why not just stop devaluing the dollar? Why try to treat the symptoms rather than the disease?

Taking money out of one person’s pocket to give it to another similarly does not create wealth or help to “grow” the economy. More on that in a second, but first, notice how the Times reports any objection to raising the minimum wage:

In the past, raising the minimum wage has been anathema to many Republicans and some business interests, like the National Restaurant Association, which argued in 2007 that an increase would cost jobs. Economists, meanwhile, disagree about the effects on the job market.

Economists disagree? Notice this phrasing, which could be interpreted to mean that economists disagree with Republicans and “business interests” that an artificial mandated wage hike would cost jobs. This is presumably exactly the conclusion the Times would have readers draw, although what they really mean is that economists disagree with each other, with many if not most agreeing with “Republicans” and “business interests”.

Let’s just think about this logically. Consider a small business owner whose budget allows him to hire five employees working for a certain wage. If you mandate that the business owner increases wages, that is going to cut into his profits. Now, you could argue that this owner shouldn’t be greedy, but let’s set aside personal judgments and assume in our case that this businessman is an honest, hard-working individual who is himself trying to make a living for his family, pay his mortgage, etc., and would like to pay his employees as much as possible while still keeping his business venture worthwhile for himself. We will assume that owning a business doesn’t automatically, by default, make you a selfish, greedy, heartless S.O.B.

So what can this guy do to maintain profitability now that the government is mandating that he increase wages? Well, he basically has two options. He can cut back everyone’s hours, or he can let someone go. Either way, somebody loses. There is a third option, which is that he could try to increase the prices for his goods or services, but then fewer people might buy them, so let’s just assume that his prices are already set according to market equilibrium based on supply and demand and that any change would be detrimental and not beneficial to his business. Now, whichever of the two options, cutting back hours or letting someone go, his business will be faced with a loss of productivity, which could then mean that equilibrium changes and he will need to raise prices anyways due to the decrease in supply of his goods or services. Which just means the increased costs resulting from the mandated wage hike are being passed on to consumers.

True, each worker that stays on may now have more money in his or her pocket to spend, but this extra money doesn’t just appear out of nowhere. It came from somewhere. Let’s go further and assume yet another option, that this business owner is a saint who keeps all his employees on at the new higher wage, taking the loss upon himself. So what does this mean? Mr. Jackson apparently thinks it means more money will be spent, since those workers now have more cash in their pockets. But where did the cash come from? It came from our saintly businessman’s pocket. Sure, his employees now have more to spend, but only by the same amount the owner has less.

Mr. Jackson is repeating the “broken window” fallacy identified by Frederic Bastiat over a century and a half ago, the fallacy of focusing on what is seen while ignoring what is unseen. In this case, he is focusing on the immediately visible effect that the workers have more money in their pocket. But he is ignoring the less obvious fact that this just means the owner has less money in his pocket, or that all these workers now work fewer hours and thus don’t actually have more money in their pockets at the end of the week, or that now one of these workers who is the least productive will now be without a job altogether, or that now consumers will now have to pay higher prices for the same goods and services.

Taking money out of one person’s pocket by force and putting it into another’s does not create economic growth. If anything, interfering with the market pricing system only harms productivity and thus lowers society’s standard of living as a whole.

Wages are a price like any other, and should be determined by supply and demand. Ditto interest rates. We see what happens when the Fed artificially lowers interest rates below what they otherwise would have been if we actually had a free market economy (which we don’t). The Fed’s inflationary monetary policy created the housing bubble that precipitated the financial crisis and high unemployment situation we now find ourselves in.

Let’s get back to this “economists disagree” business. I did a quick Google search keeping my eyes peeled for papers on the effects of minimum wage increases on employment. I immediately found a study by David Card and Alan B. Krueger. They point out that “the textbook model” of a minimum wage increase is that it will create higher unemployment—something the Times doesn’t mention.

The authors studied the fast-food industry in New Jersey and Pennsylvania. Pennsylvania was the control group while New Jersey experienced a minimum wage increase. They concluded: “We find no indication that the rise in the minimum wage reduced employment.” In fact, they found that “full-time equivalent employment increased in New Jersey relative to Pennsylvania.” They concede that “these findings are difficult to explain”.

Maybe not so difficult. David Neumark and William Wascher did a follow up study concluding that Card and Krueger’s methodology was faulty. They had collected data by telephone surveys, while Neumark and Wascher used the actual payroll data. Using the actual payroll data led them “to the opposite conclusion from that reached by” Card and Kreuger.

This is just two studies. I don’t have time to research this further at the moment, but just think about it logically and decide for yourself whether you agree with Mr. Jackson’s argument, which also depends on another fallacy, which is that economic growth comes from spending. Mr. Jackson apparently believes that if workers would just spend more, then growth would occur. But economic growth does not come from spending. It comes from saving, from deferring consumption and creating capital to invest in improving means of production. Cash merely exchanging hands does not in and of itself increase society’s standard of living. Our lives improve when we are able to buy more for less, which comes when production is increased, which comes from investment of capital, which comes from deferring spending.

There is no magic formula for economic growth. We have to learn to live within our means. No printing press or forced transfer of wealth will increase society’s standard of living.

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About Jeremy R. Hammond

About Jeremy R. Hammond

I am an independent journalist, political analyst, publisher and editor of Foreign Policy Journal, book author, and writing coach.

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