Democrats are lacking in new ideas, so maybe that’s why Republicans are stealing their old ones. With some Republicans’ poll numbers looking grim, early last Saturday morning House Republicans rushed through legislation raising the minimum wage. The Senate votes before shutting down for August recess, and will perhaps finish what is supposedly the process of stealing — or at least neutralizing — the centerpiece of the Democrats’ fall election agenda.
Chances for Senate passage are too close to call. Despite Senate Majority Leader Bill Frist’s support, many senators on both sides are unhappy. Democrats don’t want to give up a campaign issue for the fall and complain that the bill also eliminates the inheritance tax for individual estates under $5 million; Republicans, meanwhile, take unseemly glee in getting Democrats to vote against a minimum-wage increase. But with control of Congress on the line, what is lost in the debate is how increasing the minimum wage harms the most vulnerable workers.
Unfortunately, wages for the lowest paid workers have stagnated. But minimum wage increases merely treat the symptoms. Rather than blaming companies for paying workers too little, politicians might focus on the mediocre public schools that leave young workers inadequately prepared for the workforce. The problem is more likely due to the lack of competition faced by public schools than the intense competition between firms. Simply demanding that workers be paid more doesn’t make them more productive.
A microcosm of this whole debate was on display last week in Chicago, where the city council overwhelmingly approved a $10 an hour “living wage.” While alderman ignored corporate “scare tactics” and swore to “stand firm” with organized labor, even Democratic Mayor Daley understood the consequences and challenged aldermen to say how they would replace the 8,000 jobs if Wal-Mart abandoned its 20-store expansion plan.
On an international level, imposing higher wages that aren’t justified by higher productivity means shipping out jobs to Mexico and China. After all, there are a lot of unskilled workers in the world to compete against. And liberals who support myriad regulations, such as the minimum wage, wonder why firms set up operations abroad.
Unskilled American workers are also replaced with skilled workers, who are more likely to be unionized. A group of unskilled workers with shovels might be able to do the job of one skilled worker with a bulldozer, and if their wages are low enough, firms will hire them instead. Raise their wages and the firm won’t hire them. It is not really any surprise that unions protect their already existing workers over those non-members who are just starting up the ladder.
Even among low skilled workers, it is the least skilled, poorest workers who are the most likely to lose their jobs because of a higher minimum wage.
The point of all these examples is simple: if shovels cost more, people buy fewer shovels. Economists call it the “Law of Demand” for a reason. Higher priced shovels mean that some firms will replace them with something else.
And there are other consequences. Professors David Newmark at UC Irvine and Olena Nizalova at Michigan State found that a higher minimum wage reduces how much firms invest in training young workers, and results in lower wages for these workers when they get older. Anyone who has taken an unpaid internship for a summer knows that it is an investment in the future, in which one gains experience in exchange for a small amount of work. Would these interns be better off with a “living wage” but without the internship?
Newmark and Nizalova also found that the benefit of early job experience is greatest for African-Americans, with increased minimum wages reducing their future earnings the most.
“Higher” wages come at other costs. Firms can at least partially offset the higher wages by reducing worker’s benefits, such as cutting or eliminating health insurance. While the federal minimum wage has not yet risen so high, Chicago’s proposed ordinance tries plugging all the holes and mandates $3 per hour in benefits. But this only means that the effect is felt someplace else — namely, more lost jobs.
Nothing comes for free, but if it is important enough, everyone should pay for it through higher taxes. With minimum wages, it is especially African-Americans, the unskilled, and the poorest Americans who really bear the burden of helping others. Republicans have enough good ideas. They don’t really have to steal old discriminatory retreads from the Democrats.
– John R. Lott Jr. is the Dean’s Visiting Professor at the State University of New York at Binghamton.