The Bromide of the Minimum Wage
Published: Friday, February 22, 2013
Updated: Sunday, February 24, 2013 16:02
Upon accepting the 1974 Nobel Prize in economics, Friedrich Hayek noted, “In the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, will hardly ever be fully known.”
Despite Hayek’s warning about the limitations of human knowledge, many of our political leaders, including both Democrats and Republicans, still suffer from the condition that they think they can understand markets better than the producers and consumers of such markets. This “pretense of knowledge” (to use Hayek’s famous phrase) recently manifested itself in the State of the Union Address when President Obama called on Congress to raise the federal minimum wage from $7.25/hour to $9.00/hour and then index the minimum wage to inflation. Obama argues that raising the minimum wage would help boost incomes and be a step towards reducing poverty.
While the President’s call to raise the minimum wage by $1.75 may not seem significant (especially compared to an absurd call by The Huffington Post for a $21.72/hour minimum wage, a plan that would surely devastate areas with low average-incomes-per-capita), this supposedly modest reform would come at a great cost. Some workers will get a small raise. Others will not be as lucky. Instead, employers will decide to cut minimum wage earners’ hours and, if not, fire them. Think young, low-skilled workers. Since they lack the skills and experience of others, employers may hire them at low-wages, but if the minimum wage is above the productivity of such workers, then employers will not take such risks and decide their work is no longer needed. Rather than making $7.25 or $9.00, these people will be making zero dollars/hour. Think of the psychological costs that will impose on those who are already struggling financially. We have also seen this empirically throughout history. Whenever the minimum wage rises, youth unemployment, particularly among African-Americans, rises. Conversely, whenever inflation essentially negates the minimum wage, youth unemployment falls.
The White House maintains that the argument that minimum wage causes unemployment is overblown, citing “a range of economic studies.” This range must be relatively small. According to economist David Neumark of UC-Irvine, out of more than 100 major academic studies on the matter, more than 85% “find a negative employment effect on low-skilled workers.” The White House’s plan lacks support among a majority of professional economists and threatens to harm the nation’s poorest during a time of weak economic growth.
The timing of this plan is also bad for another reason: immigration reform. The 2012 election sparked new interest in resolving issues with both America’s immigration system and the status of illegal immigrants. There is hope that some bipartisan agreement can be reached, especially with Republican Cuban-American, Senator Marco Rubio, calling for a deal. However, raising the minimum wage would undermine such reform. Immigrants, many of whom know little to no English, tend to be low-skilled. They would suffer more than anyone with a higher minimum wage. Higher unemployment among low-skilled workers, particularly immigrant minorities and minorities in inner cities, would add to greater social ills and would add to greater racial tensions in society.
The White House argues that raising the minimum wage would help struggling families. It fails to mention that most minimum wage-earners are not the major bread winners of families. Approximately 40% of those making the minimum wage live with a parent or relative. According to The Wall Street Journal, the average family income with a minimum-wage earner is over $47,000. The poverty line for a family of four is only $23,550. If President Obama wants to help families, then he should think of solutions that would provide more job opportunities for those who are the bread-winners of families, not low-skilled youths in their teens and twenties.
The minimum wage may appear to be a good policy at first glance. After all, in the richest society on the planet, it is heart-breaking to see families where middle-aged parents can barely afford to provide for their children and themselves. However, the minimum wage is demonstratively not the answer. It harms those just entering the workforce and sets back the poor. It is not a solution for helping people uplift themselves out of poverty. If our elected leaders are to understand this, then they will have to get over their own pretense of knowledge to see how economics truly works.