Presidential candidate Bernie Sanders advocates increasing the federal minimum wage to $15, more than doubling the current $7.25. Hillary Clinton, always a voice of moderation, advocates a federal minimum wage of $12.
Minimum wage laws are so wrong for so many reasons it’s hard to know where to start. Most polls indicate that a majority of Americans support such laws. That fact reflects an extremely low “EQ” level of the citizenry. By EQ I mean economics quotient.
Presumably, most people who support minimum wage laws do so because they believe they will reduce poverty and decrease income inequality. The opposite is the case, however. Simple economic logic proves the point, as well as mountains of evidence.
A question that has been asked numerous times of minimum wage advocates is this — if a $15 minimum wage will help low-income earners, why not $20 or $50 an hour? I have yet to hear a coherent response to that question. The answer is obvious, of course. Many workers are not worth $20 or $50 an hour. Many fewer workers would be hired at those wages. Unemployment would skyrocket.
Apparently there is an implicit belief that although many workers are not worth, say, $30 an hour, all workers are worth whatever the minimum wage is. That makes no sense. A frequent assertion is that all workers are entitled to a “living wage.” According to Bernie Sanders, “If you have a full-time job you should not live in poverty.” That may be true, but the policies he advocates will increase, not decrease, poverty.
On what basis do Sanders, Brown, and others believe that all workers generate $15 an hour of value for their employers? Do they expect employers to hire them if they don’t?
David Neumark, an economist at University of California Irvine, has studied the employment impacts of minimum wage laws extensively. He estimates that the new California law will result in a five to ten percent decrease in low-skilled employment. In other words, increasing the minimum wage will result in some incomes not increasing but rather decreasing all the way to zero. The unemployment caused by minimum wage laws is an all too common example of “unintended consequences.”
At the beginning of 2016 California’s minimum wage went from $9 to $10. Although that was not the only factor, a local golf course cut its greens crew from 11 to 6. The course will not be as well maintained and five jobs have been eliminated.
An analysis by a California legislative agency estimates the new law will cost California taxpayers $3.6 billion a year in higher pay for government employees. Where is that money going to come from? The proponents probably assume it will all come from the top one percent.
A perfect example of the muddled thinking of minimum wage proponents is illustrated by the following statement from the president of a local chapter of the American Federation of State, County, and Federal Employees union: “Experts say a responsible minimum wage policy is good for workers and good for business. When people have more money in their pockets, they put that money back into the economy with spending on essential goods and services.” Ah, yes, those all-knowing “experts.” Apparently, minimum wage laws are like manna from heaven. Those economists who tell us “there’s no such thing as a free lunch” must not know what they’re talking about.
Wages are a form of prices. The fundamental nature of the price system is that prices are relative. When the price of some item goes up it becomes more expensive relative to other alternatives. Mandated higher wages make labor-saving equipment and technology relatively less expensive. That results in substitution of capital for labor which in turn reduces the demand for labor and thereby increases unemployment.
In economics a central tenet is what’s called an “equilibrium price.” That is the price, or wage, that equalizes quantity supplied and quantity demanded. That is the price where there is no shortage or surplus, the price where the supply and demand curves intersect.
An undeniable reality is that, although laws can be passed to dictate a legal price, there is virtually no way laws can determine an equilibrium price. Legislating a price above or below the equilibrium price will result in either a shortage (excess demand) or a surplus (excess supply). Shortages or surpluses can do serious damage to an economy.
An overlooked aspect of minimum wage laws is that they essentially commandeer private businesses to execute social policy. Under threat of fines or arrest, private businesses are drafted by lawmakers into the war on poverty. When someone starts a business, is he aware that he is also volunteering to do community service?
To businesses politicians say, “You will pay your employees what we tell you to pay. Too bad if that offends you or that you think it does more harm than good. Too bad if it causes you to go out of business.” Because minimum-wage laws are popular with voters, destroying jobs for workers preserves jobs for politicians.
If Congress passed a law mandating that all businesses give all their employees a ten percent raise, it would probably cause an uproar. However, there’s no fundamental difference between that and a minimum wage law. Both constitute obnoxious and counterproductive intrusions into economic and personal freedom.
A favorite term used by the left is “social justice.” Is it “socially just” that a law-abiding private-business owner is told how to spend his legitimately-earned revenue and that he is told exactly how he is going to compensate his employees? When was it decided that private businesses are responsible for alleviating poverty? How does the enthusiastic use of coercion fit into the concept of social justice?
Spending other people’s money is probably the favorite pastime of politicians. They have no “skin in the game” when it comes to issues such as minimum wage laws (or spending tax revenue). It’s not their money they’re spending. It’s just some poor shmuck businessman’s. Why should politicians care what damage is done? It’s easy to be generous with someone else’s money.
The fundamental damage of legislated prices is the blockage of voluntary exchange. Minimum wage laws block some of the voluntary exchange between employers and employees. The employer would be willing to hire someone for $6 an hour, the job seeker would be willing to work for $6 an hour, but such a transaction is illegal. Unquestionably, it’s a lose-lose situation.
As is usually the case, labor unions were the main driving force behind the new California law. Since most union members already earn more than the minimum wage, it raises the question, what is their motivation? One thing’s for sure, it’s not altruism. Labor unions do not like competition from workers who are willing to work for less. It would be equivalent to BMW getting a law passed prohibiting auto prices below $50,000.
Minimum-wage laws illustrate the simple-mindedness of liberalism. Such laws are based on an abiding faith the ability of laws to solve societal problems. When you’re a hammer, everything looks like a nail. When you’re a liberal politician, every problem cries out for another law. There’s been a population explosion of new laws and regulations over the past several decades. There’s little evidence we’re better off as a result. The opposite is closer to the truth. Minimum wage laws could be Exhibit A.
◼ Liberalism’s Simple-Mindedness on Defiant Display April 8, 2016
Ron Ross Ph.D. is a former economics professor and author of The Unbeatable Market. Ron resides in Arcata, California and is a founder of Premier Financial Group, a wealth management firm located in Eureka, California. He is a native of Tulsa, Oklahoma and can be reached at email@example.com.