Pay Me More, Pay Me More, Pay Me More — 5 December 2011

This week San Francisco announced it was raising the local minimum wage to $10.24, the first locality in the country with a minimum wage over ten dollars effective January 1.  Several states have announced their plans to jump on the living wage bandwagon as well, including Washington and Oregon.   Liberals and advocacy groups, of course, applauded the move, saying that it improves the lot of low-wage people, and, because such folks tend to spend all the money that comes into their hands, it provides a boost to the local economy.

I don’t want to sound like Uncle Scrooge here, but this is yet another example of progressive policy:  a feel-good regulation that addresses a visible need – usually by commandeering someone else’s money – that results in a larger but less visible harm borne by others.

In the first place, just whom is this policy intended to help?  The usual explanation is that it helps the poor fend off the ravages of poverty.  The sorrowful image of a single mom struggling to make ends meet is a frequent attendant in such debates.  And perhaps it would if poor people were the principal occupants of minimum wage jobs, but they aren’t.  According to the Bureau of Labor Statistics, more than half of minimum wage workers are teenagers who live at home, work part time, have not finished their education, and are not the sole breadwinners in their households.  Of the rest, the vast majority are married, work part-time, and live in households well above the poverty line.  Think mom getting a part time job to help the family budget.  Only 4.1% of minimum wage workers are single parents working full-time, a smaller percentage than those among hourly workers as a whole.  And many of those work in the restaurant business, who include undeclared tips in their income.

If there is a group of underprivileged folks that minimum wage jobs help, it is inner city youth, for whom a job on the first rung of the pay scale is an opportunity to establish their worker bona fides – proving they can show up on time, do a full day’s work, handle responsibility, and giving them credibility to take a higher paying job down the road.  Raising the minimum wage actively harms these kids, as will be discussed below.

But, the proponent says, even granted the above, the fact remains that putting more money into people’s hands, particularly those who don’t have much, helps the economy.  With consumer spending making up some two-thirds of the US economy, the more consumers spending, the better.  Those who earn the higher minimum are better off, and that’s a good thing, and they help to spark the economy, and that’s a good thing too.

It’s arguments like this that demonstrate how willfully ignorant are most progressives of basic economics.  You hear this kind of argument in Washington as well, as one of the reasons often given for many of the income support programs the Democrats favor: such programs put money into people’s hands, and they are more likely to spend it than, say, those 1% -ers who would simply pocket their tax break for the rich.

This argument rests on two fallacies liberals often espouse.  The first is that $100 spent in a store is better for the economy than $100 invested in a business.  Quite the opposite is true.  Money spent at the retail level will circulate and multiply, it is true; but money invested will increase the nation’s productive capacity, and that is the key to long-term prosperity.  Capital leads to productivity, which in turn enables an economy to grow faster than its population grows.

The second fallacy is to ignore where the money comes from that is handed out to the people whose spending will supposedly move the economy forward.  Money taken out of their pockets is money they won’t spend or invest – a Newtonian equal and opposite, and a negative for the economy.

In the case of current federal policy, the money is mostly funded by borrowing from China and elsewhere, so the money is only indirectly taken out of other Americans’ pockets – indirectly in the sense that every economically sentient being in the country knows that taxes will ultimately have to skyrocket to pay off the debt.  But in the case of the higher minimum wage, the money comes directly out of the pocket of the owners of the firm.  So let’s just walk through an example and see what the reaction is likely to be.

Suppose I am the owner of a mid-sized firm making window frames for the construction industry.  I have ten minimum wage jobs on my payroll, for things like sweeping the factory floor.  Right now, with the minimum wage at, say, $9.00 an hour, my payroll for such jobs is $90 an hour, naturally plus benefits.  Now if the minimum wage goes to $10.00, I can only afford to pay nine sweepers (actually less, since the benefits will rise proportionally).  So I have a choice: I can let one of them go, I can raise prices and make my firm less competitive, or I can accept a reduced profit and defer my dream of expanding to a new location and hiring a new staff of sweepers and all the rest.  What am I likely to do?  I’ll pink-slip the least productive of my sweepers and ask all the rest to work a little harder.

But the problem goes further.  Suppose I have entry-level carpenters assistants making $10.00 already.  As a result of the new wage law, these journeymen are now at the minimum wage – making the same as a floor sweeper despite their greater experience.  So, to prevent discontent on the shop floor, I probably have to raise their salaries, too, and in turn squeeze my entire pay scale upward ever so slightly to keep relative compensation in line.  Again, the higher costs give me the same three choices, only now it’s a bigger problem.

Now let’s look at that inner city kid who’s looking for his first job.  I have an opening for a sweeper, and two candidates.  One, Jose, is 25 years old, and just got laid off from a similar job at a firm that went out of business; the other, Frankie, is an earnest-seeming kid from a bad part of town, just out of high school with no experience.  If both workers come at the same price, I’d be a fool not to hire Jose, who has proven he can do what I need.  No knock on Frankie, but he’s a greater risk, and my business is not a charity – I can’t afford to take a chance.  And the higher the minimum wage, the harder it is going to be for Frankie to find a job, because he will keep running into people with more experience than he has who are willing to work for the same wage.  Unless his asking price is equal to the value of his skill set, he is overpriced for the market.

So in actuality, the higher minimum wage makes it harder for Frankie to find a job, and it makes it harder for me to do business, to hire people, to expand, and to prosper.  Couple that with all the other constraints governments in places like California place on my business – from taxes, regulations, employee relations constraints, environmental rules, and all the rest, it should surprise no one if I decide to pull out and relocate to, say, Georgia – leaving Frankie with fewer opportunities than before.

It’s for reasons like this that California is now rated 48th out of 50 states in business climate.  Policies like high minimum wages help a few people at the expense of the many, and lead to more, not less, impoverishment.  That’s a lesson Washington might well heed.

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