Minimum Wage Arguments that Fail

 

This is supposed to be a healthcare blog, but sometimes I can’t resist talking about other issues that concern me. Please keep reading because you might learn something.

John C. Goodman, economist writing in Forbes, asks a simple question. Suppose Congress were considering a bill that would do the following: either your employer must double your wage or fire you. Is that the kind of law you would like to see passed? Most people would say no, yet that’s the same threatening edict politicians are willing to inflict on those at the bottom of the income ladder.

Goodman gives us three arguments used to justify this thinking he calls “the three worst arguments for the minimum wage.” These arguments are not explicit – they are implicit. They are so profoundly ingrained in the thinking of advocates of doubling the minimum wage that they don’t think verbalizing them is even necessary.

The Three Arguments:

  • Costs don’t matter
  • Prices don’t matter
  • Economics doesn’t matter

 

One of the fundamentals of adult thinking is realizing that “there is no such thing as a free lunch.” I learned that lesson the hard way when I went off to college and tried to buy my first new car, but that’s a story for another time.

Goodman says if Congress does something to increase someone’s income, someone somewhere has to bear that cost. Already you can see how the current occupant of the White House failed to learn this lesson since he wants us all to believe the cost of a $3.5 Trillion spending package is “zero.” There is definitely a cost and we must know who is going to pay that cost before imposing it.

Suppose the minimum wage is paid for by raising product prices and the work is done in low-income neighborhoods where low-income customers shop. Low-income households tend to spend a high percentage of their income on low-wage products, such as fast foods. To the extent this happens, a higher minimum wage doesn’t increase family income – it just recycles income.

The Congressional Budget Office (CBO) says 40% of minimum wage workers live in households with incomes more than three times the federal poverty level (FPL). Many of these are teenagers. In this case, a higher minimum wage shifts income from low-income households who pay more for the goods they buy to higher-income households where the teenage workers live.

Other studies find that the wage hike is paid for when employers reduce other benefits, such as health insurance and job training. Non-wage benefits make up about 30% of total compensation. If that happens, the wage hike doesn’t increase employee income, it just changes the composition of that income. In many cases, the aggregate costs may exceed the benefits, making the intended beneficiaries of the wage hike worse off than they were before.

Economics teaches us that prices play a vital social function. Artificially changing them creates unintended social consequences. But there are a great many people who don’t believe that, or choose to ignore it. They believe that if a price is judged too low, government can increase it and nothing bad will happen. If a price is judged too high, the government can lower it and nothing bad will happen.

What are the unintended consequences of the minimum wage?

Goodman says minimum wages lead to greater unemployment, loss of non-wage benefits, disproportionate impact on low-income youth, more racial discrimination, lost entitlement benefits if family income rises, and increased criminal activity when legal work is priced out of reach. Yet those who advocate for higher minimum wages pretend to be looking out for the poor!

Goodman says “Failing to get to the bottom of these effects before blindly legislating is worse than negligence on the part of politicians. It is public policy malpractice.”

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