President Obama has recently proposed that the federal minimum wage be raised to $10.10 an hour. It is unclear whether he is doing this in order to score a political victory that might overshadow the failure of Obamacare or out of a genuine concern for the working poor in America. Whatever his intentions, raising the minimum wage is a bad idea. Proposals like the president’s most recent initiative stem from a seductive but flawed way of thinking that I would like to examine.
Advocates of raising the minimum wage, and the minimum wage in general, have a cynical view of the employer/employee relationship. They believe that employers hold vast sums of money that they greedily withhold from employees by paying them unfair wages. Since workers are always being exploited, and employers always possess a surplus of funds, it follows that the government ought to come along every now and then and balance the scales a little.
Reality differs starkly from the way in which minimum wage advocates see the world. In reality, most businesses run on tight budgets that cannot sustain paying every employee, regardless of what they do, at least $10.10/hour. This is why unemployment rises right along with the minimum wage. When businesses are forced to pay workers more than they can afford to, they have to let some of them go. The Congressional Budget Office has predicted that an increase of the minimum wage to the proposed $10.10 would result in the loss of 500,000 jobs.
Another unintended consequence of the minimum wage is an increase in prices for consumers. Again, businesses rarely have excess funds to satisfy the demands of a mandated higher wage. When forced to increase wages, businesses often make up the difference by increasing the prices of their goods and services. If you are a minimum wage advocate, you might rationalize this fact by saying, “Well, consumers are the middle-class bourgeois — it’s okay if they suffer in order to give a little back to workers.” Alas, you would be sorely mistaken in such a conclusion. A lot of industries that employ minimum-wage workers provide the goods and services minimum-wage workers rely on every day. Who works at Wal-Mart? Minimum-wage workers. Who needs inexpensive groceries the most? Minimum-wage workers.
The minimum wage — at $10.10 an hour, at $7.25 an hour, or any other level — represents a gross oversimplification of the labor market. By mandating a minimum wage, the government is in effect saying that every person’s labor has minimum value. Think for a moment of the endless variety of minimum-wage jobs. At $7.25 an hour, you could be flipping burgers at McDonald’s, helping a farmer bale hay, or interning at a Fortune 500 company. Now ask yourself if it makes sense to appraise the labor exerted in all those jobs at exactly the same rate. Businesses and the people they employ ought to be free to negotiate wages — they are, after all, the ones who know the value of each other’s skills the best.
In general, those who support the minimum wage do so for ethical reasons. They have an honorable desire to help those in need. Where minimum wage advocates go wrong is in their choice of means of helping the needy. There are better solutions to poverty than heavy-handed government mandates. Improving access to education, for instance, would allow people at the poverty level to acquire the skills they need to rise above minimum-wage employment. Softening environmental regulations might free up business dollars that could lead to new jobs — the list goes on and on. It is this writer’s hope that minimum wage advocates can be persuaded to direct their enthusiasm to one of these causes and give up on a well-intentioned but ultimately harmful law.