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Tuesday, November 26, 2013

Ballot Box Charity

The minimum wage is hurting poor people and minorities one ballot initiative at a time

Any person with the faintest bit of economic understanding knows if you set a price for anything above the market price, demand for that product or service will decrease. Workers who don’t provide output greater than the minimum will not be hired or will be fired. We never know how many workers don’t get hired in the first place because of this silly old policy. So some of these low-skill workers never make work a habit. The bottom rung of the economic ladder gets removed.

And yet most Americans are clueless—at least if a recent outbreak of minimum wage ballot initiatives is any indication.

The Myth of the Rational Voter

Representative democracy has held the line on minimum wage increases, blunting the damage the law does. Adjusting for inflation, Bloomberg reports, “the federal minimum wage dropped 20 percent from 1967 to 2010, even as the nominal figure climbed to $7.25 an hour from $1.40, a 418 percent gain.”

Given the chance, however, voters are much more generous. What economics can’t provide, the ballot box can. Voters in SeaTac, Washington, voted to increase the minimum wage to $15 per hour for hospitality and transportation workers in and around Seattle-Tacoma International Airport. Tip protection and paid sick leave were also part of SeaTac Proposition 1. 

“People have been waiting a really long time for this,” David Rolf, president of a local Service Employees International Union, said. “For the first time in many years, the people who put fuel in jets might just be able to buy a ticket on one.”

With a few mail-in ballots to count, the measure leads 54–46 and has presumably passed. In New Jersey, voters undid Governor Christie’s veto of a $1 increase in the minimum by passing an $8.25 minimum wage with ease.

California legislators already pushed the Golden State’s minimum wage to $10 an hour this year, and lawmakers in Minnesota raised that’s state’s minimum to $7.75. 

Next year, voters in South Dakota will be asked to decide whether to increase their minimum wage from $7.25 to $8.50, with annual cost of living increases.   

MSNBC talking head Chris Hayes doesn’t understand why raising the minimum wage isn’t at the top of every politician’s agenda. Republicans and Democrats alike love the idea, he said on his show. Indeed, according to Gallup, 71 percent of Americans favored raising the minimum wage to $9 per hour, when polled earlier this year. This was the wage the President mentioned in his State of the Union address. 

But Gallup also noted that support for a higher minimum has been stronger in the past. In fact, 71 percent is the lowest approval rating in nearly 20 years. When the pollster asked the question in November 2005, 83 percent were in favor. In October of 2000, 82 percent favored a hike. In February 1995, 77 percent said they would vote for a higher minimum wage. 

Gallup guesses Americans generally favor an increase out of a “sense of charity.” It is easier to be charitable with someone else’s money. However, on the margin, Americans may be sensitive, when unemployment is high, to arguments that a higher minimum blocks low-skill workers from employment opportunities.

Shrewd Politics

In this political world, Democrats have figured out that putting a higher minimum wage on the ballot not only earns them points with unions, but increases voter turnout. Washington put an increase to raise that state’s minimum wage on the ballot in 1998 and it increased turnout by 4 percent. That doesn’t sound like much, but it was “more pronounced among voters with poor voting histories,” writes Zaid Jilani for, “who accounted for 52 percent of the drop-off voters who were moved by this issue. Many attributed the fact that Democrats won 50 percent of the House contests and narrowly won the Senate back to the minimum wage ballot initiative.”

Jilani explains turnout is 7 to 9 percent higher in initiative states during midterm elections. In Nevada in 2004, 24 percent of voters said they were motivated by the minimum wage ballot question. That same year in Florida, 19 percent of voters were motivated by a minimum wage ballot initiative. 

More importantly for Democrats, minority and young women voters are particularly motivated by these ballot initiatives. 

While voters and legislators decide the minimum amount workers can charge for their labor, the unemployment rate for young people, age 24 and under, remains over 15 percent—far above the 7 percent rate for workers aged 25 and above.  

Higher minimums are especially hard on 16-to-24-year-old black workers. In September the unemployment rate for this demographic was more than 25 percent. For all young men 16 to 24, the rate was 17.4 in September. 

Price Controls for Labor Mean Workers Queue

As Hayek taught us, no individual or group of individuals—let alone politicians or voters—is smart enough to set the correct price. Back in 2005, the National Council on Economic Education issued a report, “What Americans Teens & Adults Know About Economics.” It was a follow-up to a study done in 1999. Nearly 6,000 adults and high school students were surveyed and asked a few short questions. The survey was completed in 14 minutes on average.  

The NCEE found that “most adults and students have not mastered basic economic concepts.” The study indicated, “Fewer women than men show a good understanding of economics, and the same pattern is seen among students. Black and Hispanic adults and students are less likely than their White counterparts to get an ‘A’ or ‘B’ on the quiz.” 

There was no question about the effects of a minimum wage. The questions were much simpler. For instance, some people actually got this question wrong: “For most people, the largest portion of their personal income comes from?”  

There was a question about rent control, which is the inverse of a minimum wage question. “If your city government sets a maximum amount landlords can charge in rent, what is the most likely result?” One-third of adults and nearly 60 percent of students did not know the answer: “There will be fewer apartments available than people want to rent.” 

Overall, 42 percent of adults got a D or worse on the test. Students fared even worse, with 74 percent earning a D or an F.

These are the people who are deciding the minimum wage that workers must be paid. The vast majority haven’t run a business or made a payroll. They have no desire to grapple with, or experience in grappling with, abstract ideas such as the effect of government force in the labor market. People are kind-hearted when it’s not their work or business future on the line. Their hearts believe in giving everyone a raise: The people will spend more and everyone will benefit. 

One wonders if this direct democracy experiment will morph into voters deciding maximum rents, maximum profits, maximum CEO pay—maybe minimums and maximums that private industry can pay for all inputs. Leave it to the voters to spread prosperity around.

Voters don’t understand that the marginal worker, the very ones minimum wage is supposed to benefit, will be fired or won’t be hired in the first place with these policies. Sadly, neither those voting nor the fired workers understand why.