This commentary originally appeared in The Potpourri on March 7, 2014.
A debate rages over President Obama’s initiative to increase the federal minimum wage to $10.10 per hour by 2016. Adding to the debate, recently Wal-Mart suggested it supports this wage increase and the Congressional Budget Office released a report showing this increase would kill a half-million jobs by the second half of 2016.
An online Wall Street Journal poll shows that roughly half think it should be raised from the current $7.25 per hour. This split of public opinion is also found among economists.
Economists disagree about raising the minimum wage because studies find mixed employment results. The recent article “Economists Debate the Minimum Wage” reviews these studies and argues that much of the debate misses key points.
The typical textbook explanation is that if the government mandates a minimum wage above the market wage there will be an increase in unemployment as more people search for a job than employers want to hire.
This result was common throughout the economic literature until recently. This new wave of research favors revisionist results that show little effect on low-skilled employment from a higher minimum wage.
However, this new research considers economic models that calculate results from relatively small changes in the minimum wage-nothing close to President Obama’s recent push to raise it by 39 percent to $10.10 per hour. These models also miss a slower employment growth rate and other costs of raising the wage, which drive their revisionist results.
Artificially pricing anything by government decree leads to a misallocation of resources. This happened during President Nixon’s wage and price controls in the 1970s – remember long gas lines? – and continues to happen since President Roosevelt signed into law the first minimum wage of $0.25 in 1938.
Consider the price of Starbucks’ coffee. If mandated to be higher than the current market price, consumers will purchase less coffee and Starbucks will brew more. This will create a surplus of coffee. Instead of brewing more coffee than Starbucks will sell, they will maximize profits by only brewing the coffee that consumers’ desire, leading to less coffee purchased at a price higher than the market price.
The labor market is no different.
Another issue is that most economic models do not consider changes in the employment growth rate. Though employers may not initially fire workers, the higher wage will reduce their future hiring and discourage hiring of low-skilled workers-the group advocates hope to help.
Finally, let’s assume that everyone keeps their job when the minimum wage goes up to$10.10, which is what those who favor an increase hope.
Those who were making between $7.25 and $10.10 per hour would want a raise above $10.10 because they are likely more productive relative to others who can now make the same wage. This continues up the income spectrum. If this happens, over time there would be an increase in money demand, money supply, and demand for goods, thereby increasing inflation equal to the increase in the minimum wage – with no change in their real wage.
The underlying argument of mandating a minimum wage is to legislate a minimum standard of living. The argument to raise it is to adjust the minimum wage for increases in the cost of living.
Unfortunately, a minimum wage neither sustains a minimum standard of living nor adjusts for cost of living. Also, the cost of living is not the same across all states, so a one-size-fits-all federal wage is terrible policy.
Instead of asking the government to artificially raise everyone’s wage without higher productivity, workers will benefit more from a well-functioning market that allows them the opportunity to educate themselves and improve their skills by working.
Either way you look at it, a minimum wage does not reduce poverty and kills jobs for those who it supposedly helps.
Vance Ginn, Ph.D., is a staff economist for the Center for Fiscal Policy at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. He may be reached at [email protected].
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