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Unskilled Labor and the Minimum Wage

Like single-payer medical care, the minimum wage has one great advantage as a political idea: It can be explained on the back of a post card.  If employers are forced to pay a living wage then no one will live in poverty. For low-information voters (and the vast majority of political reporters) that’s all there is to it. Q.E.D.

No wonder liberal politicians have been advocating the minimum wage since the New Deal era. It’s been winning them favorable headlines and elections for eighty years.

But, again like single-payer, because it is a good political idea doesn’t mean that it’s a good economic one. It isn’t. A mandated minimum wage is utterly the wrong way to approach the problem of some people being unable to earn a decent living. Here’s why.

When we talk about the “U.S. economy” we are talking about the sum of all transactions that take place in the United States in a given time frame.  A transaction is nothing neither more nor less than, “an exchange of commodities between two parties that is to the benefit of both parties.” Each side of a transaction must value what it receives more than what it gives away or the transaction won’t take place. No one would willingly spend ten dollars to buy a five-dollar bill.

But a mandated minimum wage sometimes requires employers to do exactly that. No employer will willingly pay an employee X dollars an hour unless he is reasonably sure he will get more than X dollars worth of work from him. And workers just entering the marketplace are usually unskilled and therefore their labor isn’t worth much, especially as unskilled jobs are more and more being automated. In the 1940’s former Congressman Herman Badillo worked his way through high school and college by working as a pin-spotter in a bowling alley, as a dishwasher, and as an elevator boy. All three jobs are now extinct.

So a mandated minimum wage set at a level above what unskilled labor is worth has several pernicious economic effects.

First, it costs jobs. If we understand anything about economics, we understand that if you raise the price of a commodity there will be less demand for that commodity. That’s just as true of labor as it is of beef, cement, or automobiles. Teenage unemployment is currently at 20.7 percent (black teenage unemployment is at a horrendous 38 percent). Raising the minimum wage will increase that unemployment or the law of supply and demand is false. A job at a subpar wage is a lot better than no job at all. That’s especially true as very few full-time employees stay at the minimum wage they started at. Once they acquire some skills and become more valuable to the employer, they start getting raises. Raising the minimum wage just keeps them from getting on that all-important first rung of the ladder.

Second, it helps the wrong people. The typical minimum-wage earner is not a head of household or primary breadwinner. He’s a teenager flipping hamburgers or bagging groceries after school. Thirty-nine percent—well over a third—of minimum wage earners live in families with incomes at least three times the poverty level. The average family income of minimum wage earners is $48,000 a year.

Third, the people who need the help—heads of households—would be far better helped by the earned income tax credit, which is predicated on family income, not individual wages, with no economic disruption. In other words the EITC is a medicine with far fewer undesirable side effects than the minimum wage. One reason that politicians don’t like it is that it shows up on the federal books, adding to the deficit, which the minimum wage doesn’t.

Fourth, the reason the minimum wage is so strongly backed by labor unions (the prime lobbying force at work here) is that while few of their members earn the minimum wage, many of them contractually earn multiples of it. So raising the minimum wage for those earning $7.25 an hour bagging groceries also raises the wages of those earning, say, $29 an hour (plus benefits) as a skilled worker. In other words, raising the minimum wage tends to raise the price of labor across the wage-earning spectrum, reducing the demand for labor across that entire spectrum.

Fifth, raising the minimum wage will only accelerate the trend to robotics and automation replacing unskilled labor. Five years ago, the grocery store I often go to had fourteen checkout lines, all manned by clerks. Today it has fourteen checkout lines, six of them manned by computers. Jack up the minimum wage by 39 percent, as Obama wants to do, and do you think in a few years there might be only one line that’s manned by a minimum wage worker instead of a computer? I do.

The minimum wage is a classic example of a really lousy idea that, unexamined, sounds noble. It’s not, it’s economic poison.



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