Minimum Wage, Maximum Stupidity

The Wall Street Journal makes the intelligent argument that raising the minimum wage will likely lead to greater unemployment. Since I took economics in college, I already knew that, but it seems the soon-to-be Speaker Nancy Pelosi and her party need a refresher course...

Nancy Pelosi, the presumptive Speaker of the House, has pledged to raise the minimum by over $2, to $7.25 from $5.15. And President Bush has already signaled he'd go along. At the state level, six states not only approved minimum wage hikes in referendums this week but indexed the minimum to inflation going forward. We hope Mr. Bush fights off any attempt at federal indexation and insists on a provision to protect small business.

Raising the minimum wage has been a hardy perennial of the left for decades now. What is striking is the degree to which is has come to be seen as an economic free lunch. Even some reputedly unbiased economists have started to tout the view that raising the minimum wage has no discernible effect on job creation.

But if this were true, they'd be calling for a $10, $20 or even $50-an-hour minimum wage. They're not, and neither is Nancy Pelosi. That's because the law of demand is one of the most dependable precepts of economics. It says that when the price of something goes up, demand for it goes down. An employee's wages are the price the employer pays for his services, so raising their wages means forcing employers to pay more for workers. The price goes up and there is downward pressure on demand for workers. Other things being equal, jobs are lost.

...The theory propounded by the advocates of a higher minimum wage is this: The market for minimum-wage jobs is neither efficient nor fair. Workers don't have adequate information about the alternatives available to them, and employers don't know enough about what the true market-clearing price is. So employers impose an artificially low wage rate on the disadvantaged, who as a result don't work as hard and tend to quit more often than they would if they were paid "fairly." Raising the minimum wage increases productivity and decreases turnover (because workers are more satisfied), which lowers the real cost of the job as well as the frictional costs of constantly seeking and training new workers (costs the employer was unwittingly paying because he didn't know the "correct" price to pay his workers). Everyone is better off; no one suffers.

The problems that afflict this idyll are no different from every attempt to replace market-determined prices with planned ones. Even if it is true that some workers are underpaid, and it probably is (we've never met another journalist who thought ink-stained wretches, as a class, were overpaid), there's still the problem of determining what the right wage is. Why would anyone suppose that Nancy Pelosi knows that better than the supermarket manager?

She doesn't, but politicians never stop to consider whether someone else is smarter than them (as can be seen anytime Joe Biden tries to question a judicial nominee). But raising the minimum wage is one of those stupid things Democrats advocate because it's good politics (in a way, it's the Democrat's version of the gay marriage issue -- the GOP may oppose it, but they don't want to say so pubnlicly for fear of being called the party of the corporate interests). Never mind that passing the raise in the minimum wage costs low-income workers their jobs -- the same workers the Democrats claim to represent. It's not about actually helping people -- it's about perception and benefitting your political allies in the unions, who can claim that this is a victory for the working man. In reality, it's a victory for squashing small-business expansion and encouraging bigger companies to automate. But don't expect anyone on Capitol Hill to say so.

In the meantime... for all the conservatives who thought it was worth it for the GOP to lose both Houses of Congress... the first two major initiatives to pass Congress and be signed by the President next year will likely be a hike in the minimum wage and a guest-worker immigration bill with some form of amnesty. I'm not disagreeing that the party needed a cold slap in the face and will probably emerge from this electoral defeat with an opportunity to reform itself into a better party in the future. The price the country will pay, however, might be greater.