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The Minimum Wage Folly

There are few policy prescriptions dearer to the hearts of liberals than the minimum wage. In theory it provides a “living wage” to those at the bottom of the economic pyramid and what could be wrong with that? Indeed, argue against it and the average liberal will look at you as though you were Mr. Bumble dismissing Oliver Twist’s request for some more porridge.

The concept dates back to the 1890’s when it was first used in Australia and New Zealand. American states first set minimum wage requirements in 1912, although the Supreme Court ruled them unconstitutional as an impairment of contract. The federal minimum wage appeared in 1938 and has been raised erratically ever since to keep pace with inflation. The New York Times on Sunday had a lead editorial calling for a raise in the minimum wage from $7.25 to $9.00 an hour, a whopping 24 percent increase. Paul Krugman chimed in the same day with a theoretical justification. He admits that it runs contrary to economic theory:

The question we need to ask is: Would this be good policy? And the answer, perhaps surprisingly, is a clear yes. Why “surprisingly”? Well, Economics 101 tells us to be very cautious about attempts to legislate market outcomes. Every textbook — mine included — lays out the unintended consequences that flow from policies like rent controls or agricultural price supports. And even most liberal economists would, I suspect, agree that setting a minimum wage of, say, $20 an hour would create a lot of problems. But that’s not what’s on the table. And there are strong reasons to believe that the kind of minimum wage increase the president is proposing would have overwhelmingly positive effects.

In other words, Professor Krugman is at odds with columnist Krugman, hardly for the first time.

But is it good public policy? I side with Professor Krugman.

Like rent control, the minimum wage is price fixing, setting the minimum price at which labor can be hired, just as rent control sets the maximum price at which living space can be rented. Both of these ideas are rooted in a pernicious medieval notion called the just price, the idea that everything has a proper price, one at harmony with the universe. But there is no more any such thing as a just price than there is a just temperature for a Sunday afternoon in April. Both result from the interaction of natural forces, with a result that we can like or dislike but have to accept.

Labor is a commodity, just like anything else bought and sold in the marketplace, from legal services to pork bellies. And economies consist of the exchange of commodities to the benefit of both parties. So if the employer cannot receive from an unskilled employee work worth what he is required to be paid, the employer will not hire him. No one, after all, willingly trades a ten-dollar bill for a five. 

Very few minimum-wage workers are heads of household. Most are teenagers just entering the jobs market or earning extra money after school. And teenage unemployment right now is horrendous, 23.4 percent. To raise the minimum wage by 24 percent is to guarantee that that rate will rise.

So why do liberal politicians like the minimum wage concept so much? There are two basic reasons. One is that many labor union contracts specify wage rates that are multiples of the minimum wage. Raise the latter, and you raise the former, much to the benefit of the unions that so generously fund Democratic candidates. The other is that the minimum wage is a benefit that politicians don’t have to pay for. Essentially, the politician gets to say, “See A over here? He needs help. You, B, pay him more money.” He then points to himself and says, “And you, A, don’t forget where the money came from on Election Day.”

Is there a better solution? Sure, there’s one already in place, the Earned Income Tax Credit. It is a refundable tax credit that is paid to low wage individual workers (principally those with qualifying children), raising their living standard by multiplying their earned income. Employers get to pay the market wage for labor, workers get to learn skills and experience the dignity of work. The problem, of course, is that the EITC adds to total federal outlays and thus the deficit.


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