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)

 

By | 2017-12-10T14:27:28+00:00 Tuesday, 12 February 2013|