The Minimum Wages of Politics

Striking for a “living wage” in New York City in July, 2013.


‘Economic inequality” is to be the great theme of the remainder of the Obama administration, the president announced in a speech that combined rank economic ignorance with shallow demagoguery. And the first item on Barack Obama’s new economic agenda is an increase in the federal minimum wage to $9, higher than the minimum wage in any state excepting Washington.

President Obama can reliably be counted upon to ignore elementary economics — which is to say, reality — when it is politically attractive to do so, and this case is no exception. A wage is a price — the price of labor — and raising prices lowers demand, other things being constant. The effects of a minimum-wage increase probably would not be dramatic on their own, since relatively few employed Americans make the minimum wage, though it will raise the bottom rung of the economic ladder another few inches out of the reach of those without sufficient skills or education to command a higher wage in the marketplace.

A number of academic studies purport to show that a higher minimum wage has little or no effect on unemployment. That may be true in certain narrow short-term circumstances; for it to be broadly true in the long run, the facts of supply and demand would have to be other than what they are. In fact, a higher minimum wage is a barrier to employment for the young, the lightly skilled, and those who are not currently in the work force but wish to be, a wish that can be desperate indeed for those who have long been unemployed. Some businesses will be forced to reduce their work forces, and all businesses employing lower-wage workers will have incentives to replace labor with capital — for instance, by investing in automation and moving to self-service models of customer interface. (Did you think grocery stores were installing those self-checkout systems because people like them? Hardly.) Labor-intensive traditional retail operations will see their disadvantage vis-à-vis online retailers deepen. In an economic vacuum, this would be a bad idea; combined with the new health-care law, which imposes heavy expenses on the maintenance of full-time employees, and a persistently weak job market, it is many degrees worse than it otherwise would be.

It is also a poor way to help poor people. The Congressional Budget Office estimated that the last minimum-wage increase (to $7.25 per hour) would increase wages by some $11 billion in the subsequent year, but only by $1.6 billion for poor families, meaning that it cost $6.88 to provide $1 in economic gain to poor households. Some of that additional income no doubt flowed to families that are low-income but above the formal poverty line, which is to the good, but many minimum-wage earners are nowhere near poor; rather, they are low-earning members of reasonably well-off households, including young people and parents working part-time. If our policy goal is to make work more rewarding for people at the lower end of the labor market, raising the minimum wage is a clumsy and inefficient instrument.

In any case, the main problem facing poor families is not a low minimum wage, but high unemployment. While the president likes to cite poorly understood income figures (which tell us little or nothing about the incomes of actual households at any given economic level, because the people who are in the top 20 percent or bottom 20 percent change from year to year and significantly from decade to decade), he ought to be looking instead at the data concerning household net worth and continuity of employment, which reveal problems connected tangentially at most with statutory wage floors.  

There is a way to increase wages while increasing overall employment, and that is to raise the demand for labor. Unfortunately for the planners and schemers in Washington, doing so requires more than simply passing a law. Higher demand for labor is the result of a growing and productive economy, which requires substantial capital investment, innovation, entrepreneurship, and — worst of all from the White House’s perspective — time. If Toyota should decide to add another factory to its U.S. operations, it will not be built overnight. If Southwest should decide to expand its operations further, it will be some time before that translates into more jobs at Love Field or Boeing. The Obama administration’s feckless economic policies have created a climate of uncertainty related to the tax and regulatory environment; worse, they have created a climate of certainty, too: the certainty of disastrous fiscal policies, the certainty of expensive health-care mandates, etc. Neither is helpful in creating better jobs for Americans of any level of skill or ability.