President Obama’s State of the Union speech in February was more or less the first draft of a Christmas wish list. One of his “I wants” was for a higher minimum wage—a policy that most economists agree drives up the cost of hiring and excludes low-skill workers from the job market.
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Seeing as we are entering the holiday season, however, perhaps it’s not surprising that the President and prominent Democrats are pushing to raise price floors on job suppliers. Their suggested amount, $10.10 an hour, comes from “progressive economists [who] like to point out that if the minimum wage had kept pace with inflation since its high in the late 1960s, it would now be above $10.”
While this sounds nice, as government policies often do, the real effect of setting a price floor is to cut down demand. Higher prices, fewer buyers. A new study from the Employment Policy Institute looks at a more extreme version of the price floor on employment, one recommended by groups like Fast Food Forward and Fight for 15. What would happen if we set the floor at $15 an hour?
“Using the conservative assumption,” the report explains, “that affected employment falls by three percent for each ten percent minimum wage increase, we find that roughly 460,000 jobs would be lost in the fast food industry as a consequence of a $15 minimum wage.”
And that’s just one industry. We’re not counting the people in grocery stores, retail, cashiers, and many others. It is unpleasant to think of things in this way, but the truth is that everyone’s labor is a “product” that they can sell; an employer “buys” the product of your labor. A minimum wage, then, is really the government telling you, a laborer, that you are prohibited from selling your product below a certain price. It’s a limit on your freedom—not your employer’s.
It’s for this reason that a recent report from The Heritage Foundation was able to show why current wages are quite reasonable: they track with productivity.
“Labor productivity,” the report shows, “in nonfarm businesses increased 72 percent between 1987 and 2012. Compensation increased almost as much—55 percent. However, the productivity of minimum-wage workers increased much less. Between 1987 and 2012, the average productivity of fast-food workers rose 12 percent—very close to the 9 percent increase in hourly compensation in the fast-food sector.”
In other words, the wages for most entry-level positions are tracking quite well to productivity. What President Obama wants to do is price these people out of the market, effectively keeping the salary in the hands of business owners.
So yes, the minimum wage does redistribute—to the top. It encourages employers to withhold capital from those who cannot match the higher productivity. What is true for $15 an hour remains true for $10.10 an hour.
While the behavior of markets is a difficult thing to predict—and isolated incidents do exist of minimum wage laws having measured “success”—aggregation is what proves the rule. When considering the nation as a whole, a minimum wage that exceeds productivity will result in unemployment.
“Unfortunately,” as economist Thomas Sowell puts it, “the real minimum wage is always zero.”
