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Sunday, March 10, 2013

The Minimum Wage: Apparently Benevolent, Completely Wrong

President Barack Obama used his State of the Union speech to propose a variety of initiatives to “create jobs.” Naturally, most of them involved more taxes and spending. Just turn everything over to the same politicians who have done so much to mess up the economy in the past.
Perhaps the worst of the President’s many bad ideas was raising the minimum wage. Of course, he made it seem so easy: “No one who works full-time should have to live in poverty.” Hiking the minimum wage to $9.00 an hour “would raise the incomes of millions of working families.” Moreover, “For businesses across the country, it would mean customers with more money in their pockets.” Most important—though left unsaid, of course—was that raising the minimum would likely yield more votes in the next election and more political contributions from unions.
The minimum wage always has been a dumb policy. The government obviously can mandate that companies pay a certain amount whenever they hire someone. But government cannot require firms to add new workers—at least not at present. This means the higher the wage set by the government, the more people who will be priced out of the marketplace. Most vulnerable are those with the least skills, education, and experience (African American teenagers, for example).
Although there was one noted economic study two decades ago that suggested that raising the minimum wage would not destroy jobs, it was an outlier. Economist David Neumark has reviewed more than 100 academic studies on the impact of government wage-setting and concluded that the vast majority “find a negative employment effect on low-skilled workers.”
This finding should surprise no one. If the government could create wealth ex nihilo in this way, then why stop at $9 an hour, as the President proposed? Why not $90? Why not $900? If FEE doesn’t believe that my time is worth $900 an hour, then the government should decide that it is. (I rather like that idea.)
Unfortunately, firms respond to a higher minimum as you would expect. Last year Mark Wilson of Applied Economic Strategies reviewed the economic literature and concluded, in a Cato Institute study, “Businesses rationally respond to such mandates by cutting employment and making other decisions to maintain their net earnings. These behavioral responses usually offset the positive labor market results that policymakers are hoping for.”
The best that can be said is that raising the wage floor has less of a negative effect if you raise it a little in an expanding economy than if you do it during a period of stagnation. You just can’t create more jobs by increasing employment costs.
Nor does the minimum wage have much to do with poverty, as suggested by the president. Only 0.66 percent of full-time workers and 1.7 percent of full-time hourly wage workers earn the minimum. And just 4.7 percent of minimum wage earners are heads of households working full-time attempting to raise a family. Most are teens or young adults or are working part-time. The average income of families with minimum wage workers is $47,023. Giving these people more money won’t eradicate poverty.
However, there is a more basic moral question: Who should be doing the giving? Christine Owens of the National Employment Law Project argued that government should “put money in the pockets of people who work.” Matt Miller of the Center for American Progress contended that the president should “be leading the charge to give low-income workers a raise.”  But that’s not what President Obama is doing. He is leading the charge to make other people give low-income workers a raise.
It would make more sense—and certainly be “fairer”—for Owens, Miller, the President, and others who share their views to pony up some cash themselves. They could give money away to low-wage workers in their communities. Or they could set up a foundation to which other advocates of low-income workers could contribute. Then the money could be distributed nationally. Those who donated really would be giving low-income workers a raise.
The rhetoric about filling pockets and giving away money demonstrates how today’s Leviathan state has distorted our understanding of charity. Washington politicians like to wrap their legislative initiatives in the rhetoric of service and sacrifice. But there is no such thing as compulsory compassion. One cannot give what one does not own.
Indeed, there is something otherworldly about politicians claiming to do good by punishing the very companies hiring the workers with the least opportunities. Venture capitalist Nick Hanauer complained about “private low-wage companies,” but some of them eventually turn into private high-wage companies. And all employ people who would otherwise be worse off—otherwise they would not be working at such firms.
Ironically, the minimum wage does help some workers, namely those already earning more who gain when companies respond to a rising wage floor by automating and reshuffling duties. If a firm is forced to pay extra, it will hire someone who is more skilled and can produce more. That’s why labor unions support the minimum wage, even though it directly applies to few of their members. 
If political leaders believe that Americans should write checks to the lowest paid workers, then at least the Earned Income Tax Credit spreads that burden to all taxpayers, and not just the companies that hire the most disadvantaged workers. The EITC has its own set of problems, but the costs are not hidden by shifting them onto a few employers.
The minimum wage is typical of the sorts of economic policies concocted by Washington: apparently benevolent but completely wrong. Raising the minimum wage would be bad economics. It would also be unjust. It is time the American people understood that the government does not have its own money to give away. What politicians call compassion would be theft if carried out by anyone else.

  • Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.