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Topic: minimum wage increase

The Non-Debate About the Minimum Wage

According to today’s New York Times, a recent letter signed by more than 500 economists, including a number of Nobel Prize winners, opposing the increase in the minimum wage has been tainted by the fact that it was conceived and promoted by the National Restaurant Association. The conceit of the story is that the letter, which was distributed under the name of Chapman University’s Vernon L. Smith, a Nobel laureate in economics, was really hatched by an industry group with an ulterior motive and that this somehow changes the conversation about the arguments put forth in the piece.

But while it would have been appropriate for the restaurant lobby group to make its role in the organization of the letter known, it doesn’t change the fact that their view of the issue coincides with those of most competent non-socialist economists. Indeed, it’s not as if the Times itself paid much attention to the letter when it was first released on PR Newswire. The attempt to turn this into some kind of a scandal obscures the real issue here: the push by President Obama and the Democrats to “give America a raise” by an arbitrary decision to raise the minimum wage by $2.85 to $10.10 per hour is economic snake oil.

Yet the truly unfortunate thing about this minor kerfuffle is that this sort of story is what passes for debate in the mainstream media about a measure that could do serious damage to the economy as well as hurt the poor it is supposedly intended to help. Rather than discuss the merits of the arguments, almost of all the coverage of the issue in the Times and most other liberal outlets has been limited to the administration narrative about government needing to step in to prevent big business from exploiting the little guy. The effort to depict the letter from mainstream economists as an industry plot fits in with administration talking points but it does nothing to counter the arguments put forward in the document.

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According to today’s New York Times, a recent letter signed by more than 500 economists, including a number of Nobel Prize winners, opposing the increase in the minimum wage has been tainted by the fact that it was conceived and promoted by the National Restaurant Association. The conceit of the story is that the letter, which was distributed under the name of Chapman University’s Vernon L. Smith, a Nobel laureate in economics, was really hatched by an industry group with an ulterior motive and that this somehow changes the conversation about the arguments put forth in the piece.

But while it would have been appropriate for the restaurant lobby group to make its role in the organization of the letter known, it doesn’t change the fact that their view of the issue coincides with those of most competent non-socialist economists. Indeed, it’s not as if the Times itself paid much attention to the letter when it was first released on PR Newswire. The attempt to turn this into some kind of a scandal obscures the real issue here: the push by President Obama and the Democrats to “give America a raise” by an arbitrary decision to raise the minimum wage by $2.85 to $10.10 per hour is economic snake oil.

Yet the truly unfortunate thing about this minor kerfuffle is that this sort of story is what passes for debate in the mainstream media about a measure that could do serious damage to the economy as well as hurt the poor it is supposedly intended to help. Rather than discuss the merits of the arguments, almost of all the coverage of the issue in the Times and most other liberal outlets has been limited to the administration narrative about government needing to step in to prevent big business from exploiting the little guy. The effort to depict the letter from mainstream economists as an industry plot fits in with administration talking points but it does nothing to counter the arguments put forward in the document.

The Times contrasts the anti-minimum wage letter with another letter issued by economists endorsing the president’s proposal. According to the paper, that letter was the work of a liberal think tank backed largely by contributions from labor unions. The think tank involved didn’t conceal its role. But they did misrepresent many of its signers since they failed to note that many of those involved were either socialist now or admitted to supporting the failed god of the left at some point in their careers.

As even the Times had to admit, they couldn’t find a single signer of the anti-minimum-wage letter that thought they’d been hoodwinked into backing the statement. Nor were they paid to do so. All those quoted said its origin was a non-issue and that what they were interested in were the ideas that it presented. But that is exactly what the Times and the rest of the media on the Obama bandwagon don’t want to do.

The National Restaurant Association was wrong to be so shy about its participation in the effort. Its members, who represent a wide gamut of business owners, including many small and individual proprietors know all too well what happens when governments try to intervene in the market in this manner. Higher salaries at the lowest levels of employment sound like a nice thing and minimum-wage hikes are always popular. But most of those who benefit from it are not poor and the net effect of the measure is almost always to reduce the number of jobs. As the economists wrote:

As economists, we understand the fragile nature of this recovery and the dire financial realities of the nearly 50 million Americans living in poverty. To alleviate these burdens for families and improve our local, regional, and national economies, we need a mix of solutions that encourage employment, business creation, and boost earnings rather than across-the-board mandates that raise the cost of labor. One of the serious consequences of raising the minimum wage is that business owners saddled with a higher cost of labor will need to cut costs, or pass the increase to their consumers in order to make ends meet. Many of the businesses that pay their workers minimum wage operate on extremely tight profit margins, with any increase in the cost of labor threatening this delicate balance.


The Congressional Budget Office’s (CBO) most recent report underscores the damage that a federal minimum wage increase would have. According to CBO, raising the federal minimum wage to $10.10 per hour would cost the economy 500,000 jobs by 2016. Many of these jobs are held by entry-level workers with limited experience or vocational skills, the very employees meant to be helped.


The minimum wage is also a poorly targeted anti-poverty measure. Extra earnings generated by such an increase in the minimum wage would not substantially help the poor. As CBO noted, “many low-wage workers are not members of low-income families.” In fact, CBO estimates that less than 20 percent of the workers who would see a wage increase to $10.10 actually live in households that earn less than the federal poverty line.

These important points have been buried under the avalanche of populist propaganda engendered by the president’s campaign for the change. The minimum wage, as well as the overtime measure endorsed by the president this week, is the centerpiece of the administration’s effort to focus attention on income inequality. But the problem with the anemic economy that the president has presided over in his five years in office is not income inequality but the way government interventions in the market have impeded the growth that is the only answer for increasing the wealth of all Americans, including the poor. Instead of a debate about economics we get outdated talking points about business and labor that were best left behind in a past when Americans hadn’t learned how much damage liberal big-government schemes had done.

The president is counting on the non-debate about the merits of the minimum wage being trumped by a populist campaign intended to breathe life into his lame-duck administration. But let’s hope House Republicans listen to the common sense about the minimum wage in the economists’ letter rather than be buffaloed into doing something that will hurt the economy and the poor.

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Obama’s Free Lunch One-Man Government

As the new NBC News/Wall Street Journal poll shows, confidence in President Obama’s ability to handle the economy or put the country on the right path continues to decline. But with more than two and a half years to go until his successor is chosen, the president is barreling ahead and attempting to implement his liberal agenda without congressional assent or much public support. This is a dubious strategy for any president, let alone one whose approval ratings are at all-time lows with little prospect that they will recover as he heads inevitably to the lame duck portion of his second term.

But in order to counteract these trends, the president has chosen what, at least in theory, are the most populist measures available to him. Hence, the “give America a raise” theme he introduced in his State of the Union speech in January that sought to pin a comeback on an effort to implement a hefty increase in the minimum wage. The follow-up comes this week as he builds on that sweeping measure with another designed to play to the same populist sentiment: changing the regulations about overtime payments. The law requires workers to be paid overtime for the hours they labor above the normal confines of the workweek. But the same laws have always exempted supervisors and management employees from these regulations. Obama wants to change that to allow more of those who run the workplace to benefit along with their employees with extra pay for extra hours.

But the truth about this proposal is that it is just as much an example of liberal economic snake oil as the minimum wage. Promising people a free lunch is always popular. But someone has to pay for it, and those who will be most affected by the president’s fiat will not be rich or powerful. That the president is shoving this down the throat of the country in a manner that undermines constitutional checks and balances that provide for accountability shows how desperate the White House has become for cheap and ultimately ephemeral political wins.

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As the new NBC News/Wall Street Journal poll shows, confidence in President Obama’s ability to handle the economy or put the country on the right path continues to decline. But with more than two and a half years to go until his successor is chosen, the president is barreling ahead and attempting to implement his liberal agenda without congressional assent or much public support. This is a dubious strategy for any president, let alone one whose approval ratings are at all-time lows with little prospect that they will recover as he heads inevitably to the lame duck portion of his second term.

But in order to counteract these trends, the president has chosen what, at least in theory, are the most populist measures available to him. Hence, the “give America a raise” theme he introduced in his State of the Union speech in January that sought to pin a comeback on an effort to implement a hefty increase in the minimum wage. The follow-up comes this week as he builds on that sweeping measure with another designed to play to the same populist sentiment: changing the regulations about overtime payments. The law requires workers to be paid overtime for the hours they labor above the normal confines of the workweek. But the same laws have always exempted supervisors and management employees from these regulations. Obama wants to change that to allow more of those who run the workplace to benefit along with their employees with extra pay for extra hours.

But the truth about this proposal is that it is just as much an example of liberal economic snake oil as the minimum wage. Promising people a free lunch is always popular. But someone has to pay for it, and those who will be most affected by the president’s fiat will not be rich or powerful. That the president is shoving this down the throat of the country in a manner that undermines constitutional checks and balances that provide for accountability shows how desperate the White House has become for cheap and ultimately ephemeral political wins.

Like the hike in the minimum wage, it sounds perfectly fair and seems to address the supposed problem of income inequality. Why shouldn’t government force profitable companies to fork over more of their profits to their workers? Such measures appeal to resentment about big business and sympathy for those struggling to get by in a struggling economy.

But while implementing the new overtime rules may direct more cash to the pockets of some deserving workers, it will also hurt the very companies the country is counting on to help pull us out of the economic malaise that America is currently stuck in and reduce employment and growth.

As was the case with his blithe admonition for all Americans to get a raise, President Obama speaks as if money can be pulled out of the air to give to those who are hard-working or deserving without anyone other than the undeserving rich being made to pay for it. But this sort of magical economic thinking seems more appropriate to a banana republic than the economic engine of the free world.

The basic facts of life are that the increases in pay will have to be paid for by cuts in overall employment and wages. That will mean companies—large and small—will be forced to cut back on their workforces or to think twice about expanding their businesses. Once the applause for the free lunches being delivered by the president dies down, many of those who think they will benefit from his largesse will soon realize that they have become victims of basic rules of economics. And unlike the president, they will not be able to disregard or pretend that the force of Obama’s personality and good intentions or the wave of his imperial hand can override the math.

It is also remarkable that a president who claims to be clued into technology and cutting edge innovation would choose to ignore the economic models that show a better and more productive way to reward supervisors. The high-tech companies Obama loves to laud have always preferred rewarding those ascending the ladder of company responsibility with stock and other benefits that get them invested in their employers’ success. Merely raising wages is not only economically unsound, it is also less likely to incentivize workers and supervisors to work hard and get ahead. For a president who claims to champion the middle class, this measure is profoundly counterintuitive and unlikely to help anyone.

Last, by directing the Labor Department to change regulations in order to force through this change rather than asking Congress to do so, the president is again trying to see how far he can go in governing by executive order. The answer is that he can do a great deal on his own and the low approval ratings for Congress ought to enable him to get away with it without paying much of a political price. But if he thinks the American people are longing for him to govern as a benevolent despot, he is misreading the poll numbers. As unpopular as Congress may be, voters tend take an equally dim view of the president and still expect him to govern within the bounds of the Constitution.

Promising the voters free lunches via executive orders may garner the president cheers from his political base. But it won’t save the Democrats in a midterm election that is increasingly looking as if ObamaCare will produce another GOP landslide.

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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.

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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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