It’s a shame that economics-challenged policy analysts pushing for major increases in fast-food workers’ wages won’t read Caroline Baum’s latest Bloomberg column. In words simple enough for a typical left-wing partisan to understand, Baum explains why the idea of raising the minimum wage makes no economic sense.
I feel bad for those who are relegated to a minimum-wage job. I feel worse for those who want a minimum-wage job as a steppingstone to something better and would be denied that opportunity by the imposition of a higher wage floor. A higher wage is great for the workers who keep their jobs; it isn’t so great for those who wouldn’t get hired because McDonald’s Corp. (MCD) starts asking its existing workforce to do a bit more. With a higher minimum wage, the cost of automating certain tasks suddenly becomes more affordable.
Raising the minimum wage to lift people out of poverty has the opposite effect. So why does an idea that violates the most basic principle of economics keep coming back to haunt us? It may appeal to our humanitarian instincts, but as social policy, it fails the test.
Let’s start with the basics. As with any good or service, there is a supply of, and demand for, labor. Supply and demand meet at what’s known as the equilibrium price. The unintended consequences of setting a cap or a floor on prices have been well documented. Many economics textbooks use New York City’s rent-control laws to demonstrate the effect of price caps: a supply shortage as landlords keep apartments off the market rather than lease them at a below-market rate. The lack of supply also gives them the power to charge above-market rates on apartments that aren’t subject to rent control.
The effect of price floors is just the opposite: a surplus. More people — an increase in the supply of labor — want to work at McDonald’s at a rate of $15 an hour than $7.25. That leads to an influx of workers into the labor force and higher unemployment as new entrants fail to find a job. (You have to be looking for work to count as unemployed.) The higher the price of labor, the lower the demand.
This is so basic that it defies logic to claim otherwise. Yet that hasn’t stopped labor economists from cranking out studies purporting to show that raising the minimum wage has minimal negative consequences because only a small portion of the workforce earns the minimum wage.
The “small portion” part is more or less correct. By official counts, less than 5 percent of U.S. hourly workers earned the minimum wage or less last year, according to the Bureau of Labor Statistics. (The reason some are paid less is that there are exemptions to the law.)
The “minimal negative consequences” part is incorrect. Job growth declines “significantly in response to increases in the minimum wage,” according to Jonathan Meer, professor of economics at Texas A&M University, and Jeremy West, a graduate student at the university, co-authors of a new paper, “Effects of the Minimum Wage on Employment Dynamics.”
