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February 21, 2013 10:16 AM The Wage-Earner’s Case for the Minimum Wage

By Michael Kinsley

Even a conservative who ordinarily doesn’t care much for government regulation of business ought to find the case for a government-mandated minimum wage pretty compelling. In brief: As a conservative, you believe in the dignity of work. And it sends a terrible message about the dignity of work when working full-time doesn’t earn you enough to live a decent life.

On the other hand, even a committed liberal who’s concerned about growing income inequality ought to have some doubts about the minimum wage. The minimum wage reduces employment (or “destroys jobs,” as the accusation is usually put) by pricing people out of the market.

When two people (let us call them “worker” and “boss”) voluntarily make a deal, we can presume it must be good for both of them. Otherwise, they wouldn’t do it. This logic applies to employment deals just like any others. No one is forced to take any job, so when someone does take a job, we may surmise that he or she finds this job, at the pay being offered, preferable to other available jobs — or to no job at all. By what right and what logic do we step in and say: No, this is a deal you’re not allowed to make?

No Help

You may say that when an unemployed worker with a family to support takes a nasty job at a low wage out of desperation, this is hardly the kind of voluntary free-market decision contemplated by Adam Smith. But unless you’re offering a better job or a better wage, simply forbidding this particular deal is of less than no help. The minimum wage restricts workers as well as bosses: It forbids both categories of economic actor from making a deal they wish to make.

The current federal minimum wage is $7.25 an hour, a figure that reflects our ambivalence about the whole idea. A wage of $7.25 an hour amounts to $15,080 a year. At this rate, we’re violating the principle of free markets by having a minimum wage of any level. But $15,080 isn’t enough for anyone — let alone any family — to live on with dignity.

President Barack Obama proposes to raise the minimum wage to $9 an hour from $7.25 an hour. Economics tells us that this will destroy jobs. Anyone whose hourly work is worth more than $7.25 but less than $9 will become unemployable. What kind of favor is this to them?

Critics of the minimum wage like to say that it slices the bottom off the ladder of success. You might be able to work your economic value up from nothing to five bucks an hour to $9 an hour or (we may hope) even more. (Nine dollars an hour is still only $18,720 a year. Good luck.) But if you can’t even start the great game of life until you’re worth $9 an hour, the challenge is greater.

There are studies suggesting that the minimum wage doesn’t really destroy jobs. These get hauled out whenever an increase in the minimum wage is contemplated. They are hard to believe. In fact, I don’t believe them. The conclusion is just too counterintuitive and too convenient.

Critics of the minimum wage think this is the end of the story. To them, the minimum wage is just an anachronism from the New Deal, a sop to people who don’t believe or don’t understand the basic principles of economics.

Yet many government policies violate basic principles of economics and therefore reduce our prosperity. A perfectly legitimate answer to this objection is, “So what?” A prosperous society such as the U.S. can afford to give up some prosperity in exchange for more equality or some other social goal.

No Thanks

If we were to ask people who actually do work at the minimum wage whether they would like to see it abolished, most undoubtedly would say, “No, thank you.” Is this because they don’t know economics? Because they don’t realize how the minimum wage could take away their jobs? Because they’re crazy or duped by left-wingers who love red tape and hate America and want to see our economy strangled?

Not necessarily. Minimum-wage workers might quite reasonably think: “This is a gamble. But it’s a gamble worth taking. Maybe I’ll end up without a job, but maybe I’ll end up with a raise of $1.75 an hour.” That doesn’t sound like much of a raise, but it’s 24 percent.

You can’t know for sure in advance which effect the minimum-wage increase will have on any particular person: A raise? Or unemployment? But it’s far from irrational for minimum-wage workers to conclude at some point that the risk of losing their jobs is worth taking in exchange for the certainty of a raise. It depends on the size of the risk and the size of the raise.

Of course, it’s possible that a policy such as the minimum wage might be bad for society even if it’s good for the individuals most closely affected by it. So you go and tell someone making $7.25 or even a whopping $9 an hour that you want to eliminate the minimum wage for his or her own good. I’m not going to.

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Comments

  • Robb on February 22, 2013 12:11 PM:

    One line of this illustrates what's wrong with so many of the model-loving classical economists:
    "They are hard to believe. In fact, I donít believe them. The conclusion is just too counterintuitive and too convenient."

    And yet... there is evidence. Furthermore, no empirical evidence shows significant drops in employment...
    Reality trumps model. Models are supposed to adapt, not reality.

    Ezra Klein had an article on his blog that captures the reasoning. And it's true: there is no free lunch.
    BUT the world, it turns out, is not so simple as "more wage, fewer jobs." There are other ways firms can (and do, apparently) adjust.
    It might mean lower benefits, lower profits, and many other things.
    Only when looking at these things can we accurately assess whether to say "so what?"
    Simply deciding it's the one scariest variable (less jobs!) because that's what models say-- to hell with reality...
    That's why economics is in such lousy shape nowadays.

  • jonh on February 22, 2013 2:14 PM:

    Robb - actually, there are 'free lunches', we just tend not to notice them because they're free.

    We can start with a 15lb/sqinch 25% oxygen atmosphere, sunlight, 32ft/s/s gravity, and water. These are very, very, very rare in the universe.

    We can move on to cheap aluminum, or fast fourier transform, or the english language, ... . Generally, technology broadly understood is a 'free lunch'.

    ***********

    Re minimum wage, guaranteed basic income would be better than minimum wage, but until Nixon is not seen as a raving lunatic leftist by Very Serious People, MW is probably the best we have. It might help to present MW explicitly as an alternative to GBI -- it may get some competent economists to speak up.

  • zandru on February 23, 2013 11:12 AM:

    Robb makes a good point about the distinction between "belief" and data.

    In fact, for anyone with even the most rudimentary education, the process of learning and understanding is largely an exercise in giving up your "gut feelings" in favor of actual functioning principals and facts.

    In particular, people who haven't studied Economics have completely bizarre and dysfunctional beliefs on how an economy works, what money is, and all the accompanying stuff on prices and costs. A nation with its own currency is not identical to your wallet, for example.

    Mr. Kinsley probably took at least Econ 101, and maybe it was even Back In The Day before Friedman ruined it. But in this little essay, he's going by an obviously uneducated "gut" and is unduly influenced by businessmen who can see only the cost higher wages will impose on their "bottom line."

    Businessmen are notoriously short-sighted. Most who pay the minimum wage seem unable to grasp that giving an employee a higher wage can actually encourage them to be more productive. That is, you get back more than you give.

    Then there's the multiplier effect of people being able to spend more, thus helping other businesses etc. It's the "rising tide that lifts all boats" that JFK talked about.

    AND - it works. Whereas "trickle down" doesn't. Facts - regardless of your econo-religious beliefs.

  • Anonymous on February 24, 2013 9:09 AM:

    The people whose employment *might* (even this is far from established) take a hit are those in direct competition with potential wage-earners in far-lower cost-of-living societies (Bangladesh, Thailand, Malaysia -- even China doesn't count as this any longer, as living conditions and wages there improve).
    Those whose jobs can't be outsourced, such as lower-skill personal-care, retail, wholesale, construction, and hospitality staffers, and agricultural workers (when they're not exploited undocumented workers) are not going to suffer loss of employment, since the employers involved are not only not going to lose either market-share or revenue to competitors on the basis of employment costs (unless the competition are breaking the law), they're going to enjoy gains in revenue, and that relatively quickly... ...for the obvious reason that the primary drag on our economy now is inadequate demand, from the lack of income to the middle and lower classes.
    Publicans, and their media mouthpieces (see above, conclusion notwithstanding) may well be too ignorant to understand this, and it's possible that many smaller business-people are as well. But I guarantee that the big-business management that owns and operates the Chamber of Commerce and other business lobbyists that control the Publicans are well aware of this, and lying about it.

  • smartalek on February 24, 2013 9:15 AM:

    That particular Anon = me.
    Right (probably) or wrong (unlikely, but not impossible), it's my work; credit (or blame) where it's due.