Published in the March 1, 1999 issue of The New American

The Minimum Wage: Cui Bono?

by Barry Loberfeld

One very simple question: How could anyone think that raising the minimum wage would be a good idea? I mean, exactly whom would it benefit?

Certainly not those current minimum-wage earners whose jobs will be destroyed by an increase. If tomorrow the government mandated that vendors must sell hot dogs at $10 a piece, we can be confident that there will immediately be far fewer hot dogs sold – and soon far fewer vendors selling them. What is true for goods is true for labor: People will simply not pay more for something than what they think (as opposed to what the government says) it’s worth. An employer will not hire – or retain – someone at a wage rate that makes his employment unprofitable. And so the position that gets filled at $4.25 an hour, goes unfilled at $5.20 an hour. Sadly, such reasoning falls on the deaf ears of those who continue to insist that the effects of raising the minimum wage cannot really be all that bad. Newsday columnist Robert Reno suggested, “Take a poll [among employees] at your local McDonald’s and see if you don’t get a majority voting for a raise even if it means the loss of a shift or two.” Come again, sir? How is a person better off working one 4-hour shift at $5.20 an hour than two 4-hour shifts at $4.25?

Nobel Laureate Milton Friedman used to ask, “How is a person better off unemployed at a dollar sixty an hour than employed at a dollar fifty?” Today, the more sophisticated apologists for the wage increase concede: He isn’t. But, they maintain, he must be sacrificed for the greater good of those who will continue to work, now at the higher wage. Yet do even these employees benefit? Consider again the McDonald’s example. Now we all know that McDonald’s isn’t really going to cut that many shifts and lay off that many people, only to get caught short-handed for help. But neither are they going to just smile and wave goodbye to the profits eaten up by the wage increase. Instead, they’ll merely raise prices, as will many other employers of minimum-wage labor. But what about those employees who were already earning $5.20 an hour? Now they want a raise, thus creating a second – and in turn a third and then still another – level of wage increases. When the cost of labor rises thus, so does the cost of the products and services provided by that labor. The net result is that the entire cost of living goes up – for everyone, including those on a fixed income. And our minimum-wage earner? At best, the increase in the cost of living parallels the increase in his salary, in which case he’s right where he was before the wage hike (thus nullifying the notion that raising the minimum wage “would merely adjust it to keep pace with inflation”). At worst, the increase in the cost of living exceeds the increase in his salary, leaving him all the poorer. In either case, he’ll ask his self-appointed champions exactly what’s so benevolent about a “living wage” that only raises his cost of living.

Clearly, an increase in – indeed, the very concept of – the minimum wage benefits no one, which leaves us lacking only an answer for our first question: How could some consider it a good idea? Easy: Because it promises them an opportunity to be charitable to other people – with other people’s money, that is, and without having to do anything except maybe call their Congressman. For committed but lazy humanitarians, the claims of the minimum-wage proposal are just too good not to be true. These hopeful healers of the human condition will simply not be told that their legislative elixir is only political snake oil. What follows from this mentality is a willful evasion of the refutation of the minimum-wage proposition on every point. Consider the above-discussed phenomenon of an increase causing a chain-reaction rise in all salaries. One media “talking head” asked (apparently) rhetorically, “Well, isn’t it good if everyone has more money?” Actually, no. It’s not good if everyone has “more money” if it also means that now everything costs “more money.” What everyone doesn’t have is more wealth. Those who talk about the “increased purchasing power” of the working man consider him only in his capacity as a wage earner (who now receives a higher salary) and never in his capacity as a wage spender (who now pays higher prices). Again, what is polemically tagged the “living wage” – as if it were saving people from starvation – would be more honestly labeled the increased-cost-of-living wage.

Another facet of this “living wage” facade is the assumption that virtually every minimum-wage earner is a full-timer working to feed, clothe, and shelter his pregnant wife and six kids. In reality, many minimum-wage jobs are only part-time, 80% of earners live above the poverty line, and over 50% are between 16 and 24. These young people are working, not for food, but for their own car. Not that it makes any difference, though: As we’ve seen, raising the minimum wage won’t make it any easier for them to buy meals or wheels.

Since the proponents of the minimum wage know directly that they themselves are motivated by only the highest ideals, they conclude conversely that their opponents must be motivated by nothing but the lowest morals, e.g., “employer greed” (or an inexplicable sympathy with it). Apparently the idea here is that when the minimum wage is increased, the employer, like a leprechaun, has only to reach down a little deeper into his pot-o'-gold in order to pay his workers more. Again, the problem with this is, employers don’t pay employees –- consumers do. The source for the salaries of the kids behind the counter is the money you fork over for those burgers and fries. When the price of that labor goes up, so does the price of that lunch. The extra money for the higher wages doesn’t come out of Ronald McDonald’s pockets; it comes out of yours.

As I said: evading the point. None of the cheerleaders for the minimum-wage increase even think to ask – let alone attempt to answer – the question Where does the money come from? Do they imagine that Congress can just legislate wealth into existence? Yet another example: the writer who praises the increase for giving the targeted worker an annual “extra $1,800 of honest pay – not a handout, not charity and not undeserved.” You couldn’t invert the facts more perfectly if you tried. If he really did get that “extra $1,800,” then an undeserved handout is exactly what it would be, since he didn’t work any harder or longer, nor was there an increased demand for his labor. But the reality is, he doesn’t get any “extra $1,800.” Again, the working man is not just a wage earner, but also a wage spender. Again, you can’t raise the price of labor but expect the price of everything else to remain the same.

Struggling to grasp some measure of intellectual credibility, minimum-wage proponents now adduce a new argument: Empirical studies prove that raising the minimum wage doesn’t lower the employment rate. Two points – one made, one not. First, I’ll state yet again that the main result of raising the minimum wage will be rising prices – on everything, for everyone. Absolutely nobody contends that an increase would destroy all (or even a majority of) minimum-wage jobs. Second, “empirical studies” prove nothing. Bear with me. The employment rate is not the single effect of a single cause (viz., an increase in the minimum wage), but the single effect of a multitude of causes. To isolate empirically the influence of raising the minimum wage, all other factors would have to remain constant. In the real world, that just doesn’t happen. It is a priori economic reasoning that demonstrates the inherently harmful nature of an increase in the minimum wage. If such an increase goes into effect and yet no discernable drop in employment occurs, it means only that the “depressing” force of the new wage was overcome by the “uplifting” force of other, positive factors. There is nothing here that disproves that the minimum-wage increase always exerts a negative influence on an economy. Why support this increase when the best that can be hoped for is that its destructive effect – i.e., its only possible effect – will be neutralized?

The simple truth is, the minimum wage is a fatally flawed concept. Its fundamental premise is that earnings should be determined, not by market exchange, but by “need” – America Needs a Raise. Force employers to pay more and all will be well. Granting this, why not raise the minimum wage to ten, fifteen, twenty-five dollars an hour? Because even the wage-hike advocates themselves don't deny that turmoil would ensue. They propose a more modest increase precisely because they know that it will be less harmful – which is quite different from something genuinely beneficial.

This reductio ad absurdum, a classic, also works in reverse. The minimum wage, we are told, provides a floor without which pay would plummet to “exploitative levels.” Oh. So if Congress lowered the minimum wage to $3 an hour, McDonald’s would also lower its wages to $3? And if it went down to $1.50, then that’s what everyone would start paying? And if it bottomed out at $0 – what? We would see masses of people with “no choice” but to go to work for no money? (I’m almost afraid to mention those individuals who do choose to work for no money, viz., volunteers, but I find irresistible the temptation to speculate as to whether the Department of Labor will soon crack down on churches and charities for employing people at “exploitative levels.”)

One particular outrage that cannot go without comment is that the “progressive” politicians who bemoan the inadequacy of the current minimum wage are the same ones who perpetuate the taxation of the minimum wage. That’s right: The minimum wage is taxed like any other. Why? Where is the logic in creating a minimum wage, only to then change it, via taxation, into a subminimum wage? Just who is it we’re trying to help here – the working man or the IRS? Rather than raise the minimum wage, let the low-end wage earner keep his paycheck and he’ll have, not only “more money,” but more wealth.