Eliminate, don’t raise, minimum wage

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Greg Morin

Greg Morin

By Greg Morin

Of the various flavors of government interventionism in our lives, the minimum wage is perhaps the most welcomed. It appeals not only to our innate sense of “fairness” but also to our self-interest. It’s allure may erroneously lead us to the conclusion that because “it is popular” ergo “it is right.” Arguments for the minimum wage that are predicated on such popularity succumb to the logical fallacy known as argumentum ad populum (appeal to popularity). Mere popularity does not translate into legitimacy. The truth of this statement should be apparent to any citizen of a country that at one time exhibited popular support for prohibitions on biracial marriage and women’s voting, Jim Crow laws, and of course, slavery itself.

The more astute proponents of minimum wage laws often grab the metaphorical bull by the horns and address its most obvious conceptual flaw, namely that an extreme minimum wage ($1,000/hour) would be unequivocally detrimental. However, the argument quickly turns to dismissing this fear by demonstrating that empirically no such job loss occurs when minimum wages are slowly raised. This is akin to saying that although fire can boil water, a small fire small won’t heat it up. The support for this assertion is the oft-cited 1994 study of Card & Krueger showing a positive correlation between an increased minimum wage and employment in New Jersey. Many others have thoroughly debunked this study and it is not my intent to engage in a “weedy” deconstruction here, but suffice it to say even the original authors eventually retracted their claims.

The problem with such “studies” that purport to demonstrate a positive effect from a rising minimum wage is that there necessarily must be a positive bias even from the most fair-minded researcher. Why is that? It is quite easy to count individuals whose pay went up. What is more challenging, if not impossible, is to count the people that would have been hired but were not. Likewise, offsetting reductions in non-monetary compensation will not show up in a monetarily focused analysis.

However, empirical economic data is not entirely useless. Such data is more suited to qualitative rather than quantitative predictions (who is affected rather than how much they are affected). For example, basic economics predicts that a minimum wage will necessarily increase unemployment among those with the least experience. Indeed, if we look at the empirical evidence we see exactly that. Looking at the data from the Bureau of Labor Statistics (www.bls.gov) we find that the unemployment rate (June 2013) among 16-19 year olds is 24 percent and among 20-24 year olds is 14 percent. These values far exceed the unemployment rate (6 percent) of those workers with sufficient experience and skills to make them largely immune to minimum wage pay scales, namely 25-54 year olds. People whose productive value is less than the minimum wage are de facto unemployable. They are denied the opportunity to gain experience and skills. Their exclusion from the job market is a net loss to society.

Minimum wage laws are a misguided attempt to help “the poor” by presuming all workers are similarly situated, i.e. that the vast majority of hourly employees earn minimum wage and that they are uniformly composed of heads of households. In fact the opposite is true. Only 2.1 percent of hourly employees earn minimum wage and of that 2.1 percent over half (55 percent) are 16-24 years old.

Why are we even having this discussion? Do we really need the government to tell people to not work for less than they can survive on? Surely if people were working below a true “living wage” they would be dying in droves. Why is that not the case? The key to this question is to understand that workers earn two wages: one from their employer and one from the state. For example, someone making the current full time minimum wage earns $15,000/year, however they are also eligible for additional government benefits that bring their total remuneration to approximately $35,000/year if they are childless or up to $52,000 year if they have children. In fact, earning more does not get one out of this situation as government assistance drops off slowly or precipitously depending on how much income has increased. These decreases in benefits actually incentivize the worker to not make more lest their higher income disqualifies them for various aid programs.

These safety net systems, although started with the best of intentions, have resulted in the perverse incentive of encouraging the very thing we are trying to eliminate. Both the employer and the employee are aware of these safety nets, so each is willing to offer less and accept less given the assurance that society will pick up the tab.

Minimum wage laws are simply price fixing by another name. They allow the public to intervene in employee/employer negotiation and tell the employer “It is illegal to pay less than X for this labor” and likewise tell the laborer “It is illegal for you to sell your labor for less than X”. When it comes to handling your own affairs, your neighbors do not know better than you. We should all be free to make such decisions for ourselves without outside interference.

Regardless of our current pay, everyone always wants more. There are two routes though to obtain more. There is the unethical route of using force (government) to extract what we want. Theft is the time-honored tradition of obtaining goods with less effort than would have been expended in their honest production. But as with any theft, it is a zero sum game, there is always a winner and there is always a loser. The pie stays the same size because the thief has added nothing to it; pieces have merely been shuffled.

However, there is another route to achieve higher wages. Improve yourself so that you have a basis for negotiating. You are capital that owns itself. You have it in your power to enhance the value of that capital. Wages correlate directly to the value society places on the tasks we perform. If we acquire those skills that society values more highly then we will necessarily produce greater value for society and this in turn will be reflected in the higher wage we are able to demand. These gains are not a zero sum game. The pie gets bigger because your enhanced productivity adds to the pie.

We each hold in ourselves the ability to improve our circumstances in a way that benefits us as well as society. Self-improvement through education and/or work experience is the answer to the question: how do I earn more? Elimination of the minimum wage is a necessary, although not sufficient, condition for improving the economic value of the inexperienced or unskilled.

Want to read more? An extended and annotated version of this article is available at http://wp.me/p3IYVE-dr

Greg Morin is a member of the Libertarian party and CEO of Seachem Laboratories located in Madison. Constructive comments are welcomed to this paper or at gregmorin.com

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