January 12, 2007
Opposing Minimum Wage Hike Is Bad PoliticsBy Steven M. Warshawsky
Among the first items on the Democrats' "100 hours" agenda is raising the federal minimum wage from $5.15 to $7.25 per hour. The bill -- titled the "Fair Minimum Wage Act of 2007" -- passed the House on Wednesday, 315 to 116 (with 82 Republicans voting yes), and now will be considered by the Senate, which also is expected to pass the bill.
Under the bill, the federal minimum wage will be raised in 3 separate steps over a 26-month period. The White House has expressed opposition to the bill, unless it is paired with tax and regulatory relief for small businesses. While I agree that there is an urgent need for tax and regulatory reform -- for all businesses -- I think the President would be making a serious mistake if he opposes the proposed minimum wage increase. The economic argument against the minimum wage is far from compelling, and the political factors all point in the opposite direction.
The conventional wisdom among economists is that minimum wages are bad because they "artificially" lower demand for low-wage labor, by making it more expensive, thereby leading to a loss of low-wage employment. And who makes up most low-wage labor? Younger, unskilled, and inexperienced workers. Hence, the frequent refrain is that minimum wage laws hurt the very people they are intended to help, by reducing their overall employment opportunities.
This position was taken, for example, by Raymond Keating, chief economist at the Small Business & Entrepreneurship Council, during a recent National Review Online symposium on this issue. As he explained:
But this doesn't answer the question whether low-wage workers, as a whole, will be made better off by a higher minimum wage. If the income loss due to higher unemployment is outweighed by the increase in total wages paid to the remaining employed workers, then a minimum wage hike may, in fact, help not hurt low-wage workers as a group. And, of course, many low-wage workers will benefit individually from a higher minimum wage.
The issue here has to do with the elasticity of demand for low-wage labor. If the elasticity is high -- meaning a small increase in labor costs will lead to a large decrease in the demand for labor (perhaps through the substitution of technology) -- then a minimum wage hike may indeed hurt low-wage workers. But if the elasticity is low -- meaning the demand for labor will not significantly decrease unless there is a large increase in labor costs -- then a minimum wage hike may do what its proponents hope: Put relatively more money in the pockets of low-wage workers. I don't know the elasticity numbers for most low-wage jobs, but I suspect they are low. After all, it is not easy to "automate" retail sales or pizza deliveries or cleaning services or various other low-end service and manual labor jobs.
The next question, then, is where will the extra money needed to pay for the higher minimum wage come from? It will come from employers, who will pay relatively more of their gross revenues in wages, and from consumers, who will pay higher prices for the products produced by the now more expensive workers. Who ultimately will pay the most will depend on the nature of the business operations, the nature of the products, and the various factors that determine the supply and demand, both for the workers and the products. Surely, as Keating points out, small businesses, especially, will be hurt by a minimum wage hike. "At the margin," as economists like to say, some businesses will find they cannot remain in business at the higher wage rates.
Another major impact of raising the minimum wage will be on union workers whose contract wages are linked to a differential above the minimum wage. They have had a bad deal for the past few years, given that the federal minimum wage has not been raised since 1997, but will make up lost ground if the Democrats have their way. Whether this is a good way to set wages is a private matter for unions and companies to consider in future negotiations.
As a matter of principle, almost all free market libertarians and many conservatives oppose minimum wage laws. I am sympathetic to their point of view, and agree that there are very strong arguments in favor of less government regulation of the marketplace. However, it is not obvious a priori that total welfare will go down as a result of a federal minimum wage increase from $5.15 to $7.25 per hour. The history of minimum wage laws in this country would hardly support such a conclusion, as the nation continues to get richer and provide more employment, despite the existence of such laws. Somehow the economy has been able to adjust to previous increases in the minimum wage. I have not read any convincing arguments that the Democrats' current proposal would be an exception.
Here is something else for conservatives to think about in connection with the minimum wage issue: If the country were to take control of our southern border and stop illegal immigration (as most conservatives would like to see happen), this would lead to a decrease in the total supply of low-wage labor, which in turn would lead to an increase in the wages paid to employees at the bottom of the economy. (Again, the magnitude of the change would depend on the various elasticities.)
In other words, significantly reducing illegal immigration would lead to an increase in the wages that businesses (including small businesses) would have to pay for low-cost labor. Indeed, this is one of the reasons why many business interests oppose restrictive immigration controls. On the other hand, many proponents of such controls favor them, at least in part, on the grounds that our country's less skilled workers, especially black Americans, would benefit.
So, if you support limiting immigration, you also necessarily are supporting requiring employers to pay higher wages than they are at present. This is not much different from increasing the minimum wage.
True, minimum wage laws represent a more explicit form of economic redistribution, by mandating that a somewhat larger share of business revenues be paid to low-wage workers. But after adjusting for inflation, the real purchasing power of the current minimum wage is at its lowest level since 1955. Is it really so terrible to raise the actual value of the federal minimum wage? Why? Other than the seemingly fetishistic insistence on the standard economic case against the minimum wage (e.g., see here for Richard Posner's overheated claim that raising the federal minimum wage would be "a grave mistake"), what arguments are there? We live in a political-economic environment in which there are numerous laws that redistribute income and numerous regulations that impact on business. Unless one were to take the position that all such laws and regulations are invalid -- a position that I believe to be philosophically and politically untenable -- then it strikes me as very strange indeed to draw a line in the sand when it comes to the federal minimum wage.
Finally, the question becomes whether Republicans should oppose the minimum wage hike? I say no. This would be taking a very unpopular political position based on, at best, speculative economic arguments about how increasing the minimum wage will affect the economy. I agree with Alan Viard, a scholar at the American Enterprise Institute, who argued in the same NRO symposium that "the harmful impact of the federal minimum wage is limited" and that "this would be the wrong fight at the wrong time." There is no political upside to opposing the proposed minimum wage increase. Polls show that a higher minimum wage is supported by more than 80 percent of adults, the vast majority of whom do not stand to gain personally from such an increase. Opposing the proposed minimum wage increase will only add further to the stereotypical impression of Republicans as "heartless capitalists" who do not care for the little guy.
Frankly, minimum wage laws are among the least onerous of government regulations of the workplace. Not only do they apply to only a small fraction of the workforce (a few percent of workers at most), but they do not otherwise hamper the ability of businesses to conduct their operations in the manner they determine to be most cost-effective. In contrast, the proliferation of "anti-discrimination" laws, family and medical leave requirements, and the entire panoply of labor and employment laws impose enormous financial, administrative, and legal burdens on nearly all employers, small and large. Compared to these, minimum wage laws are of minimal importance.
If Republicans want to take an unpopular stand for economic freedom, then they should work to reform some of these truly burdensome labor and employment laws (perhaps as a quid pro quo for supporting a higher minimum wage, as the White House has intimated). These areas are where big government really sinks its claws into business.
Contact Steven M. Warshawsky