5/25

The issue of raising the minimum wage (MW) seems to maintain its political potency and headline-grabbing status. As in many of these cases, the politicians skew the facts either because of ignorance or due to malice. Probably a combination of both. As always the media does nothing to shed the light on the real facts.

The background is the drive by the president and the Democrats to pass through congress a rise in the federally mandated MW wage from about $7 per hour now to just above $10 per hour. That is a 40 percent increase—not to be frowned on. This of course dovetails with unions’ efforts to pressure high-profile businesses to pay more. Just the other day the union organized a large demonstration in front of McDonald’s headquarters asking for $15 per hour as MW. I guess the notion is that if you ask for an outrageous amount maybe they will settle somewhere along the way, thus get to $10 per hour.

The president demagogues the issue as a matter of income inequality; unions dovetail by calling it a “living wage” issue and so on. What is true is that since the legislation to fix the MW at its current level of about $7 passed, inflation alone would justify a rise in the wage to about $10.

However, the issue of minimum wage is NOT on its face a MACROeconomical issue. Even if one supports the Democrats’ case about the fairness of it, about the income inequality, etc., one needs to concede, which they do not, that it will make very little if any difference to the economy as a whole. One will just be shifting revenue from some people to another people.

The Democrats’ case is really all about the morality of it, which is fine except they are not being truthful about it and are trying to couch it as beneficial to the economy.

Most of the people, business owners, who will have to increase the pay of some of their employees if the federally mandated MW increases are small businesses, lower- to middle-class owners. Big corporations already generally pay more than the MW anyway. The unions demonstrating in front of McDonald’s corporate headquarter are doing it as a publicity stunt. McDonald hardly employs any employees (comparatively speaking) as most of the McDonald branches are franchises owned by small businesspersons. If such an owner is obligated to raise the MW of his employees he will earn less himself and will charge more for the product. The buyers of McDonald’s products are generally middle- to lower-income people. The 1 percent rarely eat at McDonald’s. So in effect we are shifting money from middle- to lower-income people (the business owner and the customers) to…lower-middle–income people—the employees. Not much of a solution to “income inequality” here.

However, on top of it being not effective, there is a much bigger problem in the Democrats’ case. Labor is like any product. It has a price and it has value. It has market equilibrium where demand meets supply. If you increase the price of labor there will be less demand for it, just like for any other product. There is no doubt and the vast majority of economists agree with the notion (which happens to make sense too) that the result of making the labor “product” (wages) more expensive will be to raise wages to many and cause few to lose their jobs. It simply makes sense that when you increase the cost of a product you will “sell” less of it. The CBO estimated in its report on this subject published a few weeks ago that over 10,000,000 people will have their earnings increased if the MW is hiked to about $10 per hour, and about 500,000 will lose their job entirely.

So the simple MORAL question is this: Are we right to make 10 million peoples’ lives slightly better off (much less than 40 percent better off because most of these people already earn more than $7 but less than $10) at the cost of devastating the lives of 500,000 who will lose their jobs?

Republicans will tell you that this loss of 500,000 jobs does have a negative macroeconomic effect on the economy. They say with some justification that if you start on the employment ladder, however low the first rung is, it is much easier then to climb up than if you are unemployed. In addition, the vast social safety net that exists today will cause the federal government to pay for these 500,000 people with unemployment, food stamps, etc. So clearly that will cost much more to the government with all the deficit and government dependency evils that come with that.

Democrats make a lot of hay over the fact that it has been years since the MW was last increased and that inflation alone justifies the increase. This, of course, is hogwash because market forces do not wait for congress to make laws. If there is a demand for employees, the demand will create its price and many, many people are earning today much more than the MW anyway because market forces took care of the inflationary adjustment. How many people who earned MW when the current level of $7 was established 20 years ago or so, are still making MW? Very, VERY few, if any.

We do not need a federally mandated MW. Let the market do what it does best. It is a better regulator than anything Washington can come up with.