With the release of the Congressional Budget Office’s report on the effects of the latest proposal to raise the federal minimum wage, we see confirmation that mandated minimum wages are, at best, a clumsy way of trying to help those in need.
Leaving aside the fact that the CBO estimates a net loss of jobs would result from a gradual increase to $10.10 an hour by July 2016, one of the report’s most significant claims was that just 19 percent of the wage increases would be received by Americans living below the poverty line. That’s why this proposal is estimated to lift out of poverty a mere 2 percent of the total number of people then projected to be living in poverty. Indeed, a far higher percentage of the increase would go to people already comfortably above the poverty line.
Is that just?
Given the minimal (pardon the pun) effects of mandated minimum wages upon poverty, one must ask why some people invest so much intellectual energy and political capital in a policy that tends to benefit, for example, teenagers and young people from comfortable backgrounds who won’t be staying in minimum-wage jobs for very long.
In part it’s the top-down approach at work. Legislating minimum wages gives us the illusion that legislators and governments can flip a switch and make things better. Legislated minimum wages, however, aren’t immune from the workings of supply and demand.
Whether one likes it or not, employers who want their company to survive (let alone prosper) do have to consider the effects of mandated minimum wage-increases on their business’s ability to make a profit (and thereby continue employing people). And that sometimes results in a freezing or even a reduction of staff numbers in particular industries. A well-intentioned flipping of the switch, it turns out, can make matters worse for some of the very people one is trying to help.
But another aspect that’s not often considered is how policies emanating from other government institutions undermine the impact of mandated minimum wages. If, for instance, a central bank continues to follow loose monetary policy (as an ultimately ineffective way of trying to compensate for the failure of governments and legislatures to undertake the serious economic reforms that sustain growth over the long term), then the declining purchasing power of a given currency can nullify any beneficial effect of a minimum-wage increase, not to mention the gains of wage rises in general. A 3 percent decline in a currency’s purchasing power over the year, for example, more than halves the real benefits of a 5 percent wage increase in the same year.
Addressing this problem in a systematic manner would logically imply some rethinking of, among other things, monetary policy. Instead we find that minimum-wage increases are often justified by the erosion of the real value of wages. Well, that’s one way of making up some of the loss. Yet it doesn’t address one of the core reasons for the erosion. Moreover in light of continuing erosion, any benefit of the minimum-wage increase is only fleeting.
Put another way, proposals to raise minimum wages can often be a way of avoiding addressing some of the deeper problems that (1) help to keep many people just above or just below the poverty line on an economic tread-mill, and (2) leaves them with the (often accurate) sense that they just aren’t getting ahead.
Surely we can do better than that.
— Samuel Gregg is Director of Research at the Acton Institute and author of Becoming Europe.