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Commentary By Jared Meyer

Minimum Wage: Separating Fact from Fiction

Economics Employment

This November, New Jersey residents will vote on raising their minimum wage a dollar an hour, from $7.25 to $8.25, following California’s successful campaign in September to raise the minimum wage to $10.00 an hour by 2016.

Support for the minimum wage is widespread

—71 percent of the public favors raising it—because there is more economic fiction than fact coming from its proponents.  

For example, David Cooper and Doug Hall wrote a paper for the union-funded Economic Policy Institute this spring supporting the Fair Minimum Wage Act of 2013, sponsored by Rep. George Mill (D-CA) and Sen. Tom Harkin (D-IA). The Act would raise the federal minimum wage to $10.10 an hour by July, 1 2015 and index it to inflation afterwards. They argued this would give working families, and the overall economy, a much-needed boost.

Cooper and Hall also claimed the Act would raise wages of 30 million workers, who would supposedly receive over $50 billion in additional income by 2015. Over that period, GDP would increase by roughly $30 billion, they say, resulting in the creation of approximately 140,000 net new jobs.

But their assertion that raising the minimum wage would create 140,000 new jobs defies economic logic. What business owner would be encouraged to increase hiring after the costs of employment are raised?

Cooper and Hall forget their basic economics when they assert that government-mandated higher wages would lead to a $30 million increase in real GDP. If there is no increase in production from raising the minimum wage, then real GDP cannot rise. By definition, production only goes up when more goods and services are produced, not with inflated wages. Magic does not work in the realm of economic laws.

In order to justify raising the minimum wage, Cooper and Hall write that 70 percent of families making the minimum wage earn under $60,000. However, this statistic is neither surprising nor cause for alarm. Median household income for 2012 was $51,371. James Sherk of The Heritage Foundation found that the average family income of minimum wage workers exceeds $53,000 a year. Many minimum wage families are doing better than depicted in this study once they are compared to the rest of the country.

This economic ignorance is a case of what Frederic Bastiat termed ‘what is seen and what is not seen.’ What is seen are workers who keep their jobs, after the minimum wage increase, earning more money. What is not seen are workers who are now unable to find work since they are priced out of the market. As Bastiat said, “Not to know political economy is to allow oneself to be dazzled by the immediate effect of a phenomenon; to know political economy is to take into account the sum total of all effects, both immediate and future.”

The minimum wage negatively affects economic health. Workers are no longer free to develop their human capital. Businesses that employ low-skill workers bear the burden of any increase, and react by laying off workers and using more capital-intensive technology.  Think self-checkout lines in supermarkets, for instance, or automated answering services.

Only 3 percent of American workers earn the federal minimum wage of $7.25 an hour. Half of these workers are under the age of 25 and half are working in a part-time position. The image of minimum wage earners as middle-aged career workers struggling to support their families is simply incorrect.

This first step on the economic ladder is rather just that—a step. 1 in every 8 workers in the United States has held a job in McDonalds’ 750,000 person workforce. The company’s high employee turnover rate, of around 150 percent, is due to aspiring young workers, or people in transition periods between jobs, going to McDonald’s to earn supplemental income or gain desired work experience. Raising the minimum wage limits the options of those who already face limited options.

Work experience gained is key. America’s culture has always emphasized the value of working hard and investing in a stronger future. Most young people have the drive that is necessary to succeed, but when the minimum wage becomes too high above market level, they are deprived of the opportunity because employers do not hire them. They are left reaching for a higher rung on the ladder. If it is too high, they become discouraged and stop seeking work.

These days the government can tell a 17 year old boy who is saving up for his first car, and has a passion for motors, that he cannot work for $7 an hour as an assistant at his local auto shop. This issue goes far beyond rights of businesses to pay what they judge to be best; it infringes upon workers’ rights to develop their most important assets—their human capital.

With 24 hour news networks and more think tanks than can be counted, it is difficult for Americans to separate fact from fiction in economic arguments, especially about the minimum wage. When some attempts to mislead are as egregious as Cooper’s and Hall’s, a response to correct the record is warranted. As the economist Murray Rothbard said, “It is no crime to be ignorant of economics… but it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

Let us hope New Jersey residents are able to sift through the fiction to find the facts about raising the minimum wage.

 

Jared Meyer is a research associate at the Manhattan Institute for Policy Research