The Folly of a 'Minimum' Wage
An obscure election last month in the small city of SeaTac surrounding the Seattle airport was little noticed in the national press. SeaTac is a mostly poor community of 27,000 whose economic engine is the airport that employs most of them. The cause for notice was SeaTac’s November ballot initiative, Proposition 1. It would raise the minimum wage to $15 - 63% higher than the $9.19 minimum wage for Washington, already the highest of any state in the union. The jobs affected will be those in the airport and surrounding transportation and hospitality businesses.
Only 6,000 total votes were cast in the Prop 1 initiative and it passed by only 77 votes. The campaign for and against it was expensive, costing businesses and unions over $300 per vote cast. The losers, the business coalition, are calling for a hand recount so the outcome won’t be known until next week.
But will the SeaTac businesses be the losers in the end?
There is ample research to show that increases in the minimum wage by force of law rather than the force of the market always costs jobs. Job losses don’t happen immediately. Maybe that’s why those who believe they can defy economic law by willing it keep trying.
Setting a wage rate floor is simply price-fixing in a different disguise. Suppose your favorite restaurant raised its prices 63% across the board. Most likely you’d dine at a different restaurant. When gasoline prices rose to record levels last year, what did people do? They car-pooled, they substituted public transportation, they telecommuted from home. Gasoline inventories piled up forcing down the price. How is that any different than raising labor prices – labor that is no more productive after increasing its cost than it was before?
The laws of supply and demand are not voluntary. They weren’t established by ballot initiative or enacted by government. All of the cork-popping heard after the Prop 1 vote count came in will ultimately go for naught. The affected SeaTac businesses will not swallow higher labor costs and continue doing business as they were, which the Prop 1 advocates seem to think will happen. Some will relocate, as they threatened to do. Restaurants will replace wait staff with self-service buffets. Car rental customers will do more things for themselves which attendants once did for them. And automation will replace jobs. Service levels will go down, and prices will go up.
The concept of a “just wage” – advocated by the Prop 1 supporters – is rooted in the Middle Ages when wages and justice were affairs of the church before modern economies dictated prices and wages. But supporters of non-market mandates have continued to defy the will of the market. Australia experimented with minimum wage-setting in the late 1800s and couldn’t make it work. American wage reformers tried to impose their will on the market as early as 1912. But the US Supreme Court kept getting in their way by declaring unconstitutional any attempts to interfere with free bargaining by employers and workers for wages. Not until the socialistic New Deal passed the Fair Labor Standards Act of 1938 was a federal minimum wage legalized by Roosevelt’s newly “packed’ Supreme Court. It reversed its previous rulings and upheld the minimum wage, deciding it was within Congress’ Commerce Clause rights. Go figure.
The Roosevelt minimum wage was 25 cents an hour. It was raised several times, the last change putting it at $7.25 an hour in July 2009. Minimum wage increases are always a battle to push through Congress, so in 2010 Congress gave states and municipalities the power to set their own minimum wages above the federal level, which the District of Columbia and 19 states have done. In his last State of the Union speech early this year, Obama made his customary appeal to Congress to raise the federal minimum wage almost 25% to $9, arguing that "No one who works full time should have to live in poverty.” Well, Obey, almost no one does.
But let’s take Obey a step further. If prosperity can be achieved by mandating it, why not raise the minimum wage to $20 an hour or $35? Any right-thinking person knows markets don’t obey mandates, Obey.
Setting a minimum wage has been the liberals dream since Roosevelt. The fact that it assumes employers won’t react and ignoring the damage it does to jobs never enters the liberal’s calculus. In 1950 only half the jobs were affected by the federal minimum wage. Blacks and whites were employed in equal percentage and teen unemployment was not a problem. Today virtually all jobs are subject to minimum wage limitations. Teenagers – the least skilled part of the workforce – are the most unemployed. The jobs they once performed – pumping gasoline at service stations, for example – have been replaced by self-service because of minimum wages. Go to a fast food restaurant and you’re handed a cup to serve yourself at the beverage machine, something an employee once did. I bagged groceries as a kid and carried them to the shopper’s car. Today, you’ll check-out your own groceries, bag them, and carry them to your car.
Minimum wages discriminate against teenagers because they lack skills and experience. But minimum wages discriminate against black teens most because they are even less skilled and less experienced than white teens. It’s not racism. Black teens are more likely to live in broken homes with poor role models. And absent parental support, they benefit less from public education, which is terrible on its own. Not surprisingly, then, the white teen unemployment rate is 21% and black teen unemployment is almost twice that – 37%. Laws that discriminate against low skilled workers, therefore, fall heaviest on blacks and Obama wants to increase that burden. Even if low skilled workers are willing to accept less pay, the minimum wage laws prevent it. There ought to be a law against the law!
The adverse impact of a minimum wage isn’t just economic. There’s more benefit in an entry level job than the money earned. Entry level employment introduces young people to the world of work. It teaches responsibility – and consequences. It teaches work habits, respect for authority, and that hard work usually earns rewards. Kids from broken homes with deficient education would benefit most from these experiences, but minimum wage laws discriminate against them.
Moreover, the belief that a minimum wage should allow their earners to support families and avoid poverty is fundamentally flawed. The wages paid to fast food workers, retail employees, and many other businesses whose business model operates on razor thin margins rely on a low-cost part-time workforce. Many jobs are seasonal. This is done to keep costs down and pass low prices to consumers. They were never intended to provide the financial support for a family. These jobs were designed to supplement a principal income – not to be a principal income.
Not fair? Fairness has nothing to do with it. That’s the business model and every competitor follows it. Should government outlaw business models?
So, are great numbers of economic slaves toiling away on the abyss of poverty to enrich their capitalistic overlords as advocates of the minimum wage would have us believe?
The national workforce which reports a minimum wage income to the IRS is under 3%. Of those people less than one in four are in their prime working years of 20 to 64 and less than a fourth of those people live below the poverty line. For the benefit of those who vote in Palm Beach County FL let me explain that that’s one-eight of less than 3% – i.e. less than two-tenths of 1%. That doesn’t sound like a national disaster to me.
The rest are teens – half of the minimum wage workforce – who are primarily supported by their family income, and the over-65s – about one in four – who work to supplement retirement and Social Security or work simply to get out of their house a few hours a week.
We don’t know how many of those who earn minimum wages in the prime working years are between jobs that pay more than minimum wages. But we do know that the stereotypical single parent working full time at minimum wage to support a family is fallacious. The Bureau of Labor Statistics reports only one in 25 minimum wage earners fit that stereotype, and those people are eligible for the Earned Income Tax Credit which raises their effective income well above the minimum wage. They are not living on the edge of economic destitution.
Hmm, if the minimum wage workforce is tiny and the portion of it fitting the single-parent-supporting-a-family stereotype is microscopic, and if raising the minimum wage primarily denies work to people not qualified to perform jobs paying the minimum wage, why do politicians keep raising the minimum wage?
I can think of a few reasons and I’m sure readers can think of more.
First, understand that the most common elements drifting around in the universal ether are hydrogen and stupidity. Those who advocate for raising the minimal wage would quickly admit that increases in the price of beer, cars, eating out, and electricity would reduce the consumption of beer, cars, eating out, and electricity. In fact, increased taxes on tobacco reduced consumption in half in less than three decades. But the same people freely park their wits at the door while convincing themselves that raising the cost of cheap labor won’t affect its consumption by employers.
New Jersey, renown for it high taxes, saw businesses and residents flee the state for years until Republican Chris Christie was elected governor and fought unions and legislators to make the state competitive with surrounding venues. The NJ politicians learned nothing from the experience. Christie denounced their recent proposal to raise the state’s minimum wage to $8.25. Nevertheless, the state legislature passed the increase by a margin of 61%.
Congressional Democrats have introduced a bill to raise the minimum wage from its current level of $7.25 to $9.80 over two years – an increase of more than 35%. Obama, always undeterred by facts, wants Congress to raise the minimum wage by 23% immediately. This seems to prove the assertion that an ounce of a politician’s brains costs ten times more than an ounce from anyone else because ten times more politicians are needed to get an ounce of brain. Minimum wage laws are politically feel-good regulations. It never occurs to politicians to get proof that they are solving the problem they are trying to solve – something routinely done in business and science.
Second, the argument for a minimum wage is couched in the tired bromide of a moral wage. Wages are dictated by economics, not morality. However moral it might be to argue that Joe Blow should be paid $10 an hour because he deserves it, if his work produces $5 an hour in value that’s not morality. It’s stupidity. Morality can’t be legislated. If morality was the basis of politics there would be no politicians.
Politicians decry the outsourcing of work to other countries, allegedly exploiting a foreign workforce to build $500 flat screen TVs that would cost $1,500 if made with American labor. So here’s a question: ask American consumers if they’d like to pay a $1,000 “morality tax” to have TVs made in this country. I don’t think so.
Which brings me to the third reason politicians press to raise the minimum wage: unions. Unions are struggling to stay relevant while membership sinks to historic lows. Local ballot initiatives to raise the minimum wage, such as was done in SeaTac with Prop 1, may increase union membership and raise union wages.
Many union contracts specify wages that are multiples of the minimum wage. If the minimum wage goes up, union wages go up. Democrats are the beneficiaries of union political contributions, so Democrats are the chief sponsors for wage increases.
The Prop 1 initiative was architected by the union and heavily promoted by union advertising, which outspent the business coalition three to one. Because it wrote the initiative, the union inserted a provision in it which requires paid sick leave, makes part-time work difficult, prohibits sharing of tips, etc. These provisions can be waived in a union contract, but businesses that aren’t unionized must comply with them. Obviously this puts non-union businesses at a disadvantage, which is an incentive to allow their workforce to unionize.
In Long Beach CA a similar initiative was on the ballot which required hotels with more than 100 rooms to pay a $13 minimum wage and sick leave. Two Hyatt hotels caved and were unionized. However, some hotels closed rooms to have only 99 available for rent and laid off workers. The remaining workers were paid $13 an hour but had their hours cut.
It’s too early to tell if SeaTac and Long Beach are new strategies for unionizing using the minimum wage as a battering ram. The effort may fail if businesses react smartly to offset the damage. Unfortunately, the local community will lose either way. It becomes a less attractive location for new business. And its unemployment rate will rise.
This past week, Obama’s favorite union, the Service Employees International Union, orchestrated demonstrations in 100 cities outside of fast food restaurants calling for doubling their hourly wages to $15 – twice the minimum wage – or face a nationwide strike. (Yes, SEIU was behind Prop 1 too.) Young fast food workers were interviewed by eager reporters. The workers’ complaints were predictable: they “deserved” to be paid $15 an hour or at least $10 for their work. Really? There’s no one forcing you young folks to work at McDonald’s or Arby’s or Burger King. So leave. Get yourself a job paying the $10 or $15 an hour that you say you’re worth.
Uh? … not qualified for jobs paying that much, you say? I thought as much. Too bad you don’t.