Why stop at $9? A $90 minimum wage

Why stop at $9? A $90 minimum wage

Tonight President Obama proposed increasing the minimum wage from $7.25 per hour to $9.  Here is his argument from tonight’s State of the Union address (emphasis is mine):

We know our economy is stronger when we reward an honest day’s work with honest wages.  But today, a full-time worker making the minimum wage earns $14,500 a year.  Even with the tax relief we’ve put in place, a family with two kids that earns the minimum wage still lives below the poverty line.  That’s wrong.  That’s why, since the last time this Congress raised the minimum wage, nineteen states have chosen to bump theirs even higher.

Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.  This single step would raise the incomes of millions of working families.  It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead.  For businesses across the country, it would mean customers with more money in their pockets.  In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher.  So here’s an idea that Governor Romney and I actually agreed on last year: let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.

If raising the minimum wage is good economic policy, why stop at $9 per hour? Why not increase it to $90 per hour? By the President’s logic, doing so would dramatically increase the income of not just millions of working families, but tens of millions of working families, and indeed of almost all working Americans.

By the President’s logic, a $90 minimum wage would be good for American businesses because their customers would have more money in their pockets. A full-time worker making the minimum wage wouldn’t make $18,000 per year as the President proposes, but $180,000 per year.

I am, of course, joking, and in doing so I’m trying to demonstrate the flawed logic of a minimum wage increase of any size. In my example a typical worker whose labor is worth $20 per hour to his employer would not suddenly find himself being paid $90 per hour. He would find himself laid off because his employer would choose not to employ him rather than to pay a wage more than the value the worker produces for the firm. Since almost all Americans produce less than $180,000 of value per year for their employer, layoffs would skyrocket. Customers of American businesses would not have more money to spend, they’d have much less because they’d be unemployed.

The same logic holds, just to a much lesser degree, for a minimum wage increase of any size, including the increase to $9 proposed tonight by the President.  A minimum wage increase precludes employers from hiring, or from continuing to employ, those workers whose productive value to the firm is worth less than the new minimum wage. Like any price ceiling or price floor a minimum wage restricts supply, and an increase in the minimum wage restricts supply more. Raise the minimum wage and you will eliminate jobs for the lowest-skilled workers in America.

Who are the lowest-skilled workers? Many of them are teenagers, new immigrants, and high school dropouts. They would be the most harmed by a minimum wage increase.

Minimum wage increases are politically attractive because they sound like they’re going to help poor people and because the economic argument against it takes a little time and effort to explain. When pressed, proponents of raising the minimum wage argue that it wouldn’t reduce the number of available jobs that much because even the lowest-skilled workers are worth more than the proposed higher minimum wage. Or they argue that when the minimum wage has been increased in the past, they couldn’t find evidence that employment declined. It’s absurd to argue that a policy is good because “we don’t think it will do much harm,” or “we couldn’t find evidence of harm when we did this policy before.”

Another version of this argument is that because the minimum wage is not indexed to inflation, the real (inflation-adjusted) minimum wage declines over time without new legislation to raise it. But if the real minimum wage does decline, then a few more of the even lowest-skilled workers will now have job opportunities available to them.

No matter how hard they try, Congress can’t outlaw economics any more than they can outlaw gravity. Congress should reject the President’s proposal and in doing so maximize job opportunities for teenagers, high school dropouts, new immigrants and other low-skilled workers.

(photo credit: Ed Yourdon)

 

38 responses

  1. Or they argue that when the minimum wage has been increased in the past, they couldn’t find evidence that employment declined because it actually didn’t decline. What we should really do is just index the wage to inflation, so then we don’t need to go through this again every few years.

  2. The proposed increase in the minimum wage would be less objectionable if it were accompanied by reforms to address the disincentive effects of other transfer programs.

    At first glance it would appear that the increase of the minimum wage increases the incentive to work (even though it clearly decreases the incentive to hire). But, to some extent, it also makes it economically more feasible not to work. Unemployment benefits, while the formula differs from state to state, generally are based on a percentage of recent wages.

    Therefore, jacking up the minimum wage will also have the effect of increasing the unemployment benefits of those who lose their jobs because employers conclude the higher minimum wage is more than the worker’s value, or of those who decide to quit their minimum wage job because the benefits of not working have also been increased.

  3. Why stop at the same idiotic argument right-wingers have been making that has been empirically disproven over 80 years of the minimum wage?

    Why not make the argument “Why stop at $9, why not $9,000?”

    • This is an interesting question. If this comment means an increase to $9,000 per hour is ridiculous, that means that an increase to $9.00 per hour is less ridiculous but it does not mean the smaller increase makes sense or that it will benefit those who receive it or that it will benefit those for whom it is intended. How about some facts to back up the assertion that the proposal is good (or bad) instead of just thinly disguised ridicule? Let’s hear some of the “empiric proof” of which you speak.

      • Classic strawman argument. We could apply this argument to the issue of tax cuts increasing revenues (as suggested by the Laffer Curve). The argument goes, if we decrease taxes, we increase revenues . . . so, then shouldn’t we, using the same strawman argument of why not just increase M/W to $90/hr, we could cut taxes to %1 or lower, in which case federal coffers would be overflowing?

        And if one believes that an extreme application of the LC is ridiculous, then mean the LC in general is ridiculous, given your statement of:

        “If this comment means an increase to $9,000 per hour is ridiculous, that means that an increase to $9.00 per hour is less ridiculous but it does not mean the smaller increase makes sense or that it will benefit those who receive it or that it will benefit those for whom it is intended.”

        So, I guess then the small adjustments to tax rates as prescribed by the LC too make little sense . . .

  4. It seems that your argument is a straw man. The proposed minimum wage is $9 not $90, and while the logic is probably correct for $90, you haven’t really showed how $9 itself will cause unemployment of low-skilled workers.The question is to what extent does a $9 min wage affects unemployment of low skilled workers, not that it affects the unemployment of low-skilled workers a whole (because to some extent it does). This post needs a more substantive follow up.

    • It is pretty easy to show that a minimum wage increase will kill exactly the people it is supposed to help. Any business is not a charity. For the business to hire someone, that person must aid in producing more revenue than his cost. So, if someone costs $7.25 * 8 hours = $58 / day. Simplistically, if he produces revenue of $60 day, then the net profit is $2 day (hardly worth employing, but we will skip that for now). Then, if the cost suddenly goes to $72 day, the his revenue contribution is – $12 day. Even a fool from the left would not hire someone under those circumstances.

      So with youth unemployment over 25% and with massive additional costs coming online with ObamaCare, not only new entrants to the workforce not get hired, many already in the workforce will find themselves unemployed.

      Ergo, raising the minimum wage will be massively stupid and it will not happen. We another pie in the sky, unserious proposal from Obama.

  5. I still say that the reason the economy is bad isn’t because of wages per se but that to much product is coming from overseas destroying our own Market!!!

  6. Not true. We’ve shifted from a manufacturing based economy to a service based economy. Burgers at McDonalds still need to be flipped, people at WalMart still need a cashier to take thier money and people to stock thier shelves. So what if it costs an extra $0.50 or $1 for a burger at McDonalds or you’ve got to pay an extra dollar or two for the cheap Chinese imports at WalMart if it means you can increase a persons standard if living? If businesses don’t pay thier employees enough to live then taxpayers wind up footing the bill through welfare, food stamps, Medicaid, etc. Taxpayers have had enough with this corporate welfare! Pay your employees a living wage! Enough is enough.

    • The difference is that raising the wages will raise the prices of the items the higher-paid workers produce or sell. Employers pass labor costs through to their customers. Increasing a price will make people buy less of that product, which will pinch the manufacturers’ or sellers’ margins and increase the risk of that business failing. It will certainly decrease the profits of the business and decrease the value of its stock, its ability to borrow money and its ability to adjust inventories. Increased labor costs, unless they are driven by the marketplace competition for good workers and skills, are always going to arm sales and reduce employment. If that were not so, we could make a law that forces all businesses to pay everybody $100,000 per year without any consequences.

    • Minimum wage was never meant to provide a living wage. It’s for entry level, no skill jobs. You are not entitles to a “living” wage simply because you exist. If you are an adult, married, with kids, making the minimum wage then it’s obvious that you made some wrong choices in life.
      Besides, it is not just those making minimum that would get the increase. All those making between the current minimum and $9.00/hr would want an increase and those just over $9 would want their wages increased. On top of that you have the employer social security contribution. All of those increased labor costs would raise the price of products you buy thereby canceling out the increase in the minimum wage.

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  8. Pure strawman attack. The president never argued raising it to a level higher than experienced, non-entry level, employees are making. Just as there are negative consequences for it being too low, there are also negative consequences for it being too high.

    • The difference is that the negative consequences of wages being too low will be adjusted by the marketplace as workers find opportunities to make more money and move from one job to another. Employers who pay “too little” will lose employees to those employers who pay “the right amount.” Our problem is that we want to define “too little” and “too much” in terms of the needs of the workers; the proper way to define it is in terms of the costs and benefits of production and the resulting profits that drive employment. Businesses are not operating for the benefit of their employees, they are operating for the benefit of their CUSTOMERS. They hire people to make money, not to pay wages. The wages are a cost to employers, not a benefit to them. They are also a pass-through cost to customers, which means the responsible thing for a profit-seeking business to do is to minimize that cost; that is, to pay enough to get people to do the job, but no more than that. That is pretty basic economics.

  9. Why is the minimum wage, EVEN at $9.00 per hour, a bad way to raise incomes?

    [from andrewsullivan.com] Dylan Matthews analyzes Obama’s proposal to bump the minimum wage to $9.00:

    “According to a 2007 study by the CBO, an increase in the minimum wage to $7.25, like that eventually passed that year, would increase wages by $11 billion, of which $1.6 billion went to poor families. By contrast, increasing the Earned Income Tax Credit for large families (as happened in the stimulus bill) and for single people would cost $2.4 billion, of which $1.4 billion would go to poor families. The EITC option costs one fifth as much to society but does about as much good for poor families. That suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.”

    That’s why.

  10. So, your argument goes like this:

    1) Reductio ad absurdum…
    2) But I’m not serious…
    3) So you can see that I’m right…

    Very convincing.

  11. As somebody who has studied economics, I have to tell you that your assertion that people whose output has a value lower than the minimum wage would become unemployed is false. The reasoning is simple: Just because an hour of “making widgets” provides less value to a company than one hour of minimum wage does not mean that the widgets need not be made, if the company requires them. If the construction of those widgets requires three full time employees, then those people will be employed, regardless of their emoluments.

    • If a company MUST have those widgets but they cost more (because of increased labor costs) they have other options: They can use another product, they can outsource them instead of producing them internally, they can drop the product line that requires them, they can cut costs someplace else and write off the excess cost of the widgets, they can increase the price of the product that uses the widgets or others. The one common factor to all those solutions is that somebody pays the extra cost. No matter who that is, the increased cost will reflect itself in less money for the company and if that continues, the result will be a loss of a job or loss of salary for someone else. All you have done by insisting that the widgets be produced when they are too expensive (“too expensive” = costing more than they contribute to the profit) is to shift the cost to someplace else. That only goes so far and it eventually makes the product non-viable, open for substitution and economic elimination. All costs are variable in the long run and companies make changes in the long run to survive. Either that “expensive” worker will lose his job, or some other worker in the company (who doesn’t make the essential widgets) will lose his job or the customers who buy the product with the widgets will buy fewer or will find a substitute, but sooner or later, one way or another, excessive pay for workers finds itself on the negative side of the economic ledger.

  12. Keith,

    Given the hour at which you posted this, I’ll assume that you rushed this post with boilerplate anti-minimum wage arguments and so I’ll give you a pass on the logic and the facts. With that said, there were some really good arguments posted on Andrew Sullivan’s blog that seem pretty persuasive and contradict your post. As a person who who always called myself fiscally conservative and who always supported the Republicans, I would like to know if there is a better conservative counter-argument to the data driven analysis that says that raising the minimum wage in the service sector doesn’t actually cause unemployment to increase?

    ays sort of took it on faith that raisignthe minimu

    • Well, one reason that nobody has bothered to mention the 101 argument is that the data don’t support it. Sometimes, things are as simple as examples from the 101 text. Often, they aren’t. When the data don’t support your theory, honest folk with a grounding in scientific don’t just keep repeating the theory. They hunt for an explanation for the gap between theory and reality.

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  14. Call it what it is. A payback to the unions (whose contracts are tied to the federal minimum wage) for getting Obama re-elected.

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