Minimum Wage

There was an article in The Economist a couple of weeks ago that had a quote from French President Chirac (and no this is not going to be a bash France article, but man does it suck on a lot of things). Here is the excerpt,

Asked on television last week why Britain's unemployment was so much lower, Mr

Chirac replied that its social rules would be “unacceptable” in France.

Now what I find interesting about this quote is that I think it sums up so many arguments on so many sides of the employment debate. Often on the issue of employment and the economy in general the debate becomes far too simple. It becomes about poor versus rich, about who ought to benefit and prosper in a nation. But frequently there are those in the middle who just see what happens and recommend stuff. In the United States academics and think-tanks perform this job, to varying levels of success. This third group is not always correct, but unfortunately when it is, which ever party that had initially rejected that claim will refuse to give in. Ultimately this spawns a destructive cycle in which the party on the wrong side fails to see that their goals would only be assisted by a change in course. This example personified is the issue of minimum wage (just imagine the minimum wage is a person and that sentence works).

Although Democrats have perfectly justifiable goals in their implementation of minimum wage, the overwhelming amount of evidence and intuition shows that it is a policy that helps no one. All it does is provide us with a sense that our social rules are somehow "acceptable" regardless of the ultimate cost. Democrats and Mr. Chirac are only interested in assisting those who suffer from an egregious market inequality (who in turn vote for them, but that’s a separate story), but the manner that they do this is destructive, lets look at the evidence.

First, intuitively minimum wage is damaging to the countries poor. Say there is no minimum wage; employers will not begin forcing workers to work for 2 dollars an hour. Well they could try, but that would fail, miserably. No one would work for such a firm and a separate firm could swoop in and hire all the employees for 2.50 an hour. Of course this process would occur over and over until the equilibrium wage is found (my guess is that it would be well over 2 dollars an hour) for various types of jobs.

Now the present federal minimum wage law is not a good example because it is so low ($5.15 an hour), but many states have minimum wages that are much higher. Connecticut has a minimum wage of $7.10 per hour; the most ridiculous is San Francisco's which is $8.50. The San Francisco example is perfect, now I guarantee you there are people in San Francisco, or that area, that are willing to work for 6, 7, even 8 dollars an hour, but can't. Of course the response to that is, "Well who cares, they get extra money, and all are happy." Well that’s incorrect. Not all are happy, in fact very few parties end up happy. I explained this in my post on French employment problems earlier. Check that out, because it is the exact same argument.

In fact, economically the only case for a minimum wage law would be in the case of a dominant employer that can actually force wages below efficiency. This type of employer has gone extinct since the advent of the car. Now some stick to the minimum wage because a recent study showed that a raise in the minimum wage had no effect on employment. However a subsequent study showed that a drop in employment does occur, it just happens before the minimum wage law goes into effect. Perhaps the strongest argument against minimum wage is that often labor unions are strong supporters of very high minimum wages. Why would this be, especially when their workers are all receiving well over minimum wage because of collective bargaining? The answer is that the mechanization that follows hikes in minimum wages causes increased demand for many skilled workers that make up unions now. Of course none of these arguments is a sure answer, but intuition gives a clear answer that all but one recent (often cited but also debunked) study have shown.

Now to finish up, I want to tie this all back in with this notion of unacceptable social rules because I think that economics offers may debunk many of our much loved "social rules" but it is doing so in attempt to benefit everyone. Sure Republicans may sell it to their constituency for a very different reason, but that does not make them wrong (and I am not happy about that either). Democrats really have to go back to what Clinton attempted to do or what Tony Blair is doing, move away from depleted labor unions and accept global trade, accept that minimum wage is not what FDR claimed it would be. Really the Democrats should be pushing for changes that benefit the poor and rich alike; one of Clinton's biggest successes was the Earned Income Tax Credit, a negative income tax if you would. More ideas like this would make the Democrats more than a party desperately holding onto FDR's legacy. We'll just have to wait and see where Hillary takes the party. It's going to be interesting.

-Mr. Alec