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Minimum wage and economics

Government intervention exacerbates the problem

Michael Plummer, Op-Ed Editor

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A livable wage. These three innocuous words have shaped congressional Democrats’ and progressive city councils’ fiscal policies for time immemorial. “Everyone, regardless of job type, deserves to be paid a wage at which they can sustain themselves,” they would argue.

Former-President Obama proposed a hike in the federal minimum wage back in 2013. The topic was central to Sen. Bernie Sanders’ (I-VT) bid for president in 2016. Since then, a handful of progressive city and municipal governments have gone ahead with legislation, forcing a rise in the minimum wage rate for all employees.

In the rush to draft nice-sounding legislation that politicians believe their voters will like, evidence-based policy-making seems to have gone the way of the dodo in places like New York, Seattle and—most recently—Montgomery County, MD.

This past Tuesday, the all-Democrat council of Montgomery County, MD voted unanimously to require a $15 fixed minimum wage rate in the next five years.

Nobody can disagree that people being well-off is better than people being poor. A strong middle class is the backbone of the American economy. And so the question ought to be: “How can we get the highest amount of poor people to become financially stable?”

And, as labor economists have stated for decades, raising minimum wage laws fails to do this.

Here’s the thing about wages: they are not set according to what is considered “fair” to the employee, they are set in accordance with how much the employee’s labor is worth in the marketplace. This is called the distribution of labor.

Let’s say you are looking to hire some employees for your small business. You can choose to employ one worker at $15 per hour (assuming that their labor creates a surplus value at that wage) or you can choose to employ two workers, each at $7.50 per hour.

Remember, these are voluntary transactions between employee and employer. These workers are willing to work at a wage employers are willing to pay.

The clear advantage here is to the two employees who are willing to work at $7.50 per hour. They now have an opportunity to offer their services and gain the type of experience, hands-on training and skills needed to progress to a higher-paying, more productive job in the future.

In the presence of a government-mandated $15 minimum wage, one of these employees would have been priced out of the marketplace entirely, therefore being denied these valuable opportunities for advancement.

Many people presume that by raising the minimum wage they are helping poor people who need the money. In reality, it does nothing of the sort. What these laws actually do is ensure that anyone with skills insufficient to justify the cost of a minimum wage are left unemployed.

As economist Milton Friedman once noted, this is because minimum wage laws effectively tell employers they must discriminate against people who have low skills.

It is by no mere coincidence that the teenage unemployment rate in the United States (13.7 percent) is more than three times that of the general unemployment rate (4.1 percent). The only assured result of minimum wage laws is that they will keep lower-skilled workers (like teenagers) out of the labor market.

Raising the minimum wage suddenly forces them to compete with older, higher-skilled workers since employers will be looking for skills proportional to the higher rate.

It is plain to see that the actual effects of these laws run contrary to those which their sponsors intended. Instead of boosting people into prosperity, they have created more unemployment and more poverty.

Economists at the University of Washington recently found that low-income workers across all businesses in Seattle actually lost an average of $125 per month because of reduced hours or job loss since the city enacted its $15 minimum wage law.

In a lengthy report commissioned by Montgomery County’s Executive Chairman, their heightened minimum wage was projected to result in “the loss of almost 47,000 jobs and $396.5 million in total income by 2022 due to workers’ being priced out of the job market by the higher minimum wage.”

Montgomery County’s woes do not end there, though. According to a report by the Washington Post, the county’s new minimum wage laws “would spell a reduction of nearly $41 million in expected county tax revenue . . . meanwhile, the county government’s payroll costs would [increase by] $10 million.” And for what?

As has been demonstrated time and time again, people are never made better off by reducing their options. People are best off when left alone by government to make decisions themselves. This is true not only in the general sense, but also in the particular context of the open marketplace.

It is true that a livable wage ought to be the goal for all workers. But we must remember that in a market economy, capital resources are privileges to be earned and not rights to be demanded. By imposing arbitrarily high minimum wage floors, more people are locked out of the labor market—even when willing to work at a mutually negotiated rate.

This is a fundamentally bad idea, and the proliferation of these disastrous fiscal policies must be halted if we truly aim to provide all people the opportunity to pursue their happiness.

Michael Plummer is a third-year student majoring in communication studies. He can be reached at [email protected]

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1 Comment

One Response to “Minimum wage and economics”

  1. Sam Dugan on November 12th, 2017 10:28 pm

    Outstanding article. The minimum wage is a classic example of good intentions with bad results.
    The minimum wage ends up hurting the very people that it is supposed to help. By pricing low-skilled people out of the labor market, it decreases class mobility.
    Not to mention, increasing the minimum wage produces an incentive for employers to move to automation, i.e., McDonald’s using kiosks instead of cashiers. Which will further increase inequality and decrease class mobility.
    Seattle’s recent wage hike is a great case-study.
    And of course, there’s the question of principle: why should anyone not be allowed to work for a voluntarily agreed upon wage?

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Minimum wage and economics