The Foundation for Economic Education (FEE) is proud to partner with Young America’s Foundation (YAF) to produce “Clichés of Progressivism,” a series of insightful commentaries covering topics of free enterprise, income inequality, and limited government. See the index of the published chapters here.
#38 – “The Minimum Wage Helps the Poor”
(Editor’s Note: A version of this essay was previously published in FEE’s journal, The Freeman, in February 2014.)
The ancient sage Socrates, a giant in the foundation of Western philosophy, was known for a teaching style by which he aggressively questioned his students. He employed his “Socratic method” as a way to stimulate logical, analytical thought in place of emotive or superficial pronouncement. Rather than lecture or pontificate, he would essentially interrogate. The result was to force his Greek pupils to see the full implications of their conclusions or to realize that what they had accepted as solid was nothing more than the intellectual equivalent of crumbled feta.
In his January 28, 2014 State of the Union speech, President Obama called upon the U.S. Congress to enact a hike in the hourly minimum wage from $7.25 to $10.10. (The dime may have been added because a nice round number without a decimal would sound unscientific.) Economists have long argued that raising the cost of labor, especially for small and start-up businesses, reduces the demand for labor (as with anything else). But progressives routinely call for increases in the minimum wage—with the usual, oversized measure of self-righteous breast-beating about helping workers. Maybe what is needed is not another lecture on the minimum wage from an economist, but rather an old-fashioned Socratic inquisition. If the old man himself were with us, here’s how I imagine one such dialogue might go:
Socrates: So you want to raise the minimum wage. Why?
Citizen: Because as President Obama says, minimum wage workers haven’t had a raise in five years.
Socrates: Can you name one single worker who was making $7.25 five years ago who is still making $7.25 today? And if you can’t, then please tell me what caused their wage to rise if Congress didn’t do it. Come on, can you name just one?
Citizen: I don’t happen to have a name on me, but they must be out there somewhere.
Socrates: Well, we’ve just been through a deep recession because successive administrations from both parties, plus lawmakers and your friends at the Fed, created a massive bubble and jawboned banks to extend easy credit. The bust forced many businesses to cut back or close. Now we have the weakest recovery in decades as ever-higher taxes, regulations, and Obamacare stifle growth. No wonder people are hurting! Do you take any responsibility for that, or do you just issue decrees that salve your guilty conscience?
Citizen: That’s water over the dam. I’m looking to the future.
Socrates: But how can you see even six months into a murky future when you refuse to look into the much clearer and more recent past? You guys think the world starts when a problem arises, as if you’re incapable of analyzing the problem’s origin. Maybe that’s why you rarely solve a problem; you just set everybody up to repeat it. If you really look to the future, then why didn’t you see this situation coming?
Citizen: Look, in any event, $7.25 just isn’t enough for anybody to live on. Workers must have more to meet their basic needs.
Socrates: An employer doesn’t have anything to pay an employee except what he first gets from paying customers. I wonder, whose “needs” do you consider when you decide to buy or not to buy: the workers’ or your own? Have you ever offered to pay more than the asking price just to help out the guy who made the product? And if customers like you won’t do that, where do you expect the employer to get the money?
Citizen: That’s not a fair question. My intent here is purely to help.
Socrates: Sounds to me like the answer is “no,” but let’s move on. Why do you assume your intentions mean more to a worker than those of his employer? It’s the employer who’s taking the risk to offer him a job, not you. You’re only making speeches about it. Don’t you see a little hypocrisy here—you, who are personally offering no one a job, self-righteously criticizing others who are actually creating jobs and paying wages even if they’re not all at a wage you like?
Citizen: Employers are interested only in profits.
Socrates: Are you saying employees are not? Are they more interested in working for companies that lose money, and if so, then why don’t they all line up for government jobs?
Citizen: Well, government “loses” money almost every year in the sense that it spends more than it takes in, and there are plenty of people who are happy to work for it.
Socrates: But government has a printing press. It also has a legal monopoly on force. When it borrows in the capital markets, it shoves itself to the head of the line at everybody else’s expense. Are you saying these are good things and that we’d be better off if the private sector could do these things too? Try to keep up with me here.
Citizen: I repeat, employers are interested only in profits. People before profits, I say! I even have a bumper sticker on my car that says that.
Socrates: So are you saying that employers would be better people if, instead of seeking profits, they tried to break even or run at a loss? How does that add value to the economy or encourage risk-takers to start a business in the first place?
Citizen: You’re trying to belittle me but I went to a state university. All of my sociology, political science and gender studies professors told us that raising the minimum wage is good.
Socrates: Were any of those tenured, insulated, and government-funded pontificators actual job-creating, payroll tax-paying entrepreneurs themselves, ever?
Citizen: That’s beside the point.
Socrates: (Sigh.) Figures.
Citizen: Look, $10.10 isn’t much. I think you must be mean-spirited and greedy if you don’t want people to be paid at least $10.10.
Socrates: Yeah, like the guys in government check their personal ambitions at the door when they take office. I’d like to know how you arrived at that number. Was it some sophisticated equation, divine revelation or toss of the dice? Why didn’t you choose $20.00, which is not only a nice round number but also a lot more generous?
Citizen: Well, $20.00 would be too high, for sure. Too much of a jump at once.
Socrates: It sounds like you think the cost of labor might indeed affect the demand for it. Good! That’s progress. You’re not as oblivious about market forces as I thought. What I want to know is why you apparently don’t think higher labor costs matter when you raise the minimum wage from $7.25 to $10.10. Do you think everyone, regardless of skill level or experience, is automatically worth what Congress decrees? Do you believe in magic, too? How about tooth fairies?
Citizen: Now hold on a minute. I’m for the worker here.
Socrates: Then why on earth would you favor a law that says if a worker can’t find a job that pays at least $10.10 per hour, he’s not allowed to work?
Citizen: I’m not saying he can’t work! I’m saying he can’t be paid less than $10.10!
Socrates: I thought we were making progress, but perhaps not. Can you tell me, if your scheme becomes law, what happens to a worker whose labor is worth only, say, $8.10 because of his low skills, lack of education, scant experience, or a low demand for the work itself? Will employers happily employ him anyway and take a $2.00 loss for every hour he’s on the job?
Citizen: Businesses need workers and $2.00 isn’t much, so common sense and decency would suggest that of course they would.
Socrates: So employers who employ people are too greedy to pay $10.10 unless they’re ordered to, but then when Congress acts, they suddenly become generous enough to hire people at a loss. Who was your logic instructor?
Citizen: Can we hurry this up? I’ve got other plans for other people I have to think about.
Socrates: OK, just one last question. Which is better, a job at $8.50 per hour or no job at all at $10 per hour. Simple math here. Pick one.
Citizen: A nice job at $10 per hour.
Socrates: I give up. You progressives are incorrigible. You’re the only people on whom my teaching method has no discernible impact. It seems that logic, evidence and economics count for nothing as long as you feel good about your intentions.
Citizens: You ask too many questions.
At this point, in utter frustration, Socrates drinks the hemlock—or at least he does in this imaginary episode.
As an economist, I wish that raising people’s wages were as simple and easy as waving a wand or passing a law but that’s just not the way the world works.
- Millions of people who are utterly unaffected by the minimum wage because they are already earning something higher to begin with see their wages rise almost every year—some even during recessions. It’s not a decree of Congress that does this; it’s factors such as productivity, capital investment and competition in the labor market.
- You can’t expect employers to pay workers more than their productivity is worth just because Congress demands it. At higher prices (or wages), less is purchased. That’s a law of economics more powerful than a minimum wage law from Congress.
- If raising the minimum wage to $10.10 makes sense, why stop there? Why not declare that everyone must be paid $50/hour?
- For further information, see:
“The Truth About the Minimum Wage” by various authors: http://tinyurl.com/llzggvb
“Minimum Wage Laws Kill Jobs” from the Cato Institute: http://tinyurl.com/jvuxnjc