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The $15 Minimum Wage Delusion

Summary:
Sen. Bernie Sanders (I-Vt.) and I have the same goals: better, higher paying jobs for everyone, especially for the poor, and a radical reduction in their horrendously high unemployment rates. We only disagree on the best means toward this goal. While he thinks a minimum wage of per hour would pretty much do the trick, I think it would be a disaster, not only economically, but also ethically. Why do I insist upon this seemingly unlikely view? Would it not be better if the wages of the unskilled were boosted upward toward this rather modest goal? After all, it is very difficult to live on a mere .25 per hour, and, if somehow this legislation were eliminated entirely, would wages not plummet toward zero? This is the view held

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Sen. Bernie Sanders (I-Vt.) and I have the same goals: better, higher paying jobs for everyone, especially for the poor, and a radical reduction in their horrendously high unemployment rates.

We only disagree on the best means toward this goal. While he thinks a minimum wage of $15 per hour would pretty much do the trick, I think it would be a disaster, not only economically, but also ethically.

Why do I insist upon this seemingly unlikely view? Would it not be better if the wages of the unskilled were boosted upward toward this rather modest goal? After all, it is very difficult to live on a mere $7.25 per hour, and, if somehow this legislation were eliminated entirely, would wages not plummet toward zero? This is the view held by many well-meaning folks.

Well-meaning as it may be, it’s also entirely erroneous. Wage legislation isn’t like a floor, holding up payments to labor. Rather, it is akin to tearing off the bottom rungs of the employment ladder. Let me explain.

Why do employers want to hire workers in the first place? It’s for their productivity (technically, marginal revenue product). Consider Joe, whose productivity is $5 per hour. This means if you have Joe on your shop floor, behind a counter, pushing a broom, or washing dishes for you, your receipts increase by that precise amount: five bucks per hour.

In the absence of any minimum wage at all, what would the firm offer him? Well, like everyone else, as little as possible. Even you, gentle reader when you purchase something, don’t you look for bargains? If not, you are unique. Suppose it is 1 cent per hour. If Joe takes him up on this offer, the employer will earn a pure profit of $4.99 per hour from his labor. Is this an equilibrated, stable situation? Of course not. Some other company will bid 2 cents and “exploit him” to the tune of $4.98.

Where will this bidding war stop? Why, at $5, assuming no transactions or other costs of putting together the two parties. That is why economists have an axiom that wages tend to equal productivity. LeBron James earns lots of money since his productivity (his ability to fill seats and draw TV audiences) is so high. I earn a middle-class income since my marginal revenue product is far less than his. The guy who asks you if you want fries with that is even less productive in terms of raising revenues for the employer and tends to be paid accordingly.

Now, consider the effect of a $7 hourly minimum wage, let alone one for $15. What happens to our man Joe? He produces $5 for his employer, but can’t legally be paid less than $7. What is the result if he is hired? The firm loses $2 per hour. That isn’t a viable option. Joe will be fired, or not taken on in the first place.

Flawed Analysis

But what of the fact that a minority of economists have done econometric studies, and have been unable to demonstrate serious unemployment effects of minimum wages, and sometimes none at all? There are two flaws in their analyses.

First, invariably, they look at the effects of an increase in the stipulated level of that law. In my view, we ought to consider not a rise in the wage minimum, but this law in its entirety. An increase to $7 from $5 will have less of an effect than the original $5, in terms of unemploying unskilled workers.

Second is timing. When the minimum wage was boosted to 70 cents from 40 cents several decades ago, elevators were operated manually. Were any of those who were employed in that capacity fired the very next day? The very next week or month? Of course not. It takes more time to substitute automatic elevators than that. But this was the necessary and inevitable result.

At 40 cents, the inferior technology was overwhelmingly competitive with the superior version—not at 70 cents. An econometric analysis that didn’t allow enough time to elapse for the change to occur would have underestimated the devastating unemployment effect.

Also, if we could raise real wages by legislative fiat, why be cheapskates about it. Why settle for $15? Why not think big and escalate to $150 per hour, or $1,500 per hour, or more? If this really worked, Aladdin’s magic lamp and the three wishes would be almost as nothing. The legislative pen could make all our desires come true.

In reality—and absent any other government transfers—it is better to be employed at $5 per hour, than unemployed at $15. Advanced mathematics demonstrates that $5 is a higher number than zero. It can’t be denied that the welfare system will pay anyone unemployed a stipend, sometimes more than $5 per hour for a 40-hour week. But to see the true effects of the law under consideration, we must avert our eyes from this reality: A minimum wage of $5 per hour will unemploy all those with productivity less than that amount.

A minimum wage of $15 per hour will make it impossible for all those with productivity less than that amount. Yes, there will be temporary boosts in wages with little or no loss of jobs until the market adjusts. Neither level will raise compensation in the long run, since this is determined by productivity. Want to raise wages on a permanent basis? Raise productivity.

Immoral Legislation

Let us now consider the (im)morality of this economically pernicious legislation. I hereby offer you $5 per hour to come to wash my car. If I were serious about this, and you accepted, we would both be violating the law, and could go to jail. What happened to free trade in goods between consenting adults?

One last immorality. Even economists who support this evil law typically report some slight unemployment effects. They content themselves by noting that wages for most workers rise as they do, in the short term. But suppose I go into the inner city and, at the point of a gun, force one out of every 20 people to give virtually all their money to the other 19 for a short-term boost of their income. How would I be considered? As a criminal, of course. So much the ethics of this law.

Reprinted with the author’s permission.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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