The Minimum Wages of Politics

by The Editors

‘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.

Changing the business environment is important, but it is also important to provide opportunities for self-improvement for low-income households, by offering more easily accessed channels of educational advancement and incentives to savings.

And good luck with that. The Obama administration may be genuine in its concern for the poor, but it has shown itself willing to subordinate that concern to political demands. One of the surest paths from low income to higher income is education, and one of the administration’s first acts in office was to declare war on a popular school-choice program in Washington, D.C., that benefited families that were overwhelmingly low-income and black. It did so at the behest of its union allies in the public sector, which resent being forced to compete for funds, preferring instead that the federal government shunt them directly into their coffers. No surprise, then, that beyond raising the minimum wage, the president also proposed raising spending on preschool programs, even though study after study shows that these are exceedingly poor investments that bring little or no return in the form of long-term educational improvement. But they do create jobs for members of the public-sector unions that fund and staff Democratic campaigns. Likewise, the administration’s eagerness to accommodate illegal immigrants and to continue the influx of low-skilled labor from abroad promises to put further pressure on the wages of those Americans who can least afford to bear it.

And while the economic situation of low-income workers is and should be a focus of our policy debate, it is at least equally disturbing and in the long term probably far more consequential that incomes and household wealth are stagnating not only at the low end but at the median as well. The president’s half-baked “middle-out” economic rhetoric is attached to no economic agenda that will strengthen the position of the vast majority of middle-class Americans. Denouncing malefactors of great wealth in the nation’s banks and boardrooms is a politically convenient way of masking the fact that the broad middle is facing serious economic challenges that have little to do with machinations on Wall Street and a great deal to do with incompetence in Washington.

Turning around the American job market means turning around the American economy in toto, which is no small thing. It requires putting the federal government, the states, and the cities on sustainable financial footing in order to create a predictable fiscal environment that encourages long-term investments. It requires deep and broad regulatory reform and a more sensible tax system, one that treats taxpayers in a more evenhanded fashion and imposes dramatically lower compliance costs. And, especially in the case of low-income young people who all too often go on to become low-skilled workers, it means radical reform of our sclerotic education system, which is one of the least effective and most dysfunctional institutions in American public life. Unhappily, the Obama administration and its Democratic allies in Congress stand in the way of reforming the schools, the tax code, and the regulatory agencies. Our most successful industries, especially the energy industry, are constantly in their crosshairs. Even highly regarded firms of a progressive bent, such as Apple, find themselves in the role of whipping boy because they do not always conduct their business in the way that their friends in Washington wish them to. The minimum-wage bill is but one manifestation of Washington’s belief that it can manage the economy on a fly-by-wire basis.

We’ve learned from the fiasco of Obamacare that passing a law purporting to make insurance more affordable and more accessible does not necessarily make insurance more affordable and more accessible, and that most of the promises attached to that so-called reform project either turned out to be unachievable in the face of economic reality or were cynical misrepresentations from the beginning. Likewise, you can pass a bill purporting to raise wages, but it will not necessarily result in higher wages. It is as likely to result in higher unemployment among lower-skilled workers, stagnation, and labor downsizing.

But as poor a policy initiative as the minimum-wage proposal is, what is perhaps worst about it is the political opportunity cost: While we’re having another emotionally charged debate about this third-tier issue, the real long-term problems facing our economy go unmentioned and unaddressed.