Minimum wage is the wrong tool for social engineering

Original Article:

  • Author: David Kreutzer

  • Publication Date: January 2008

  • Newspaper: Cleveland Plain Dealer

  • Topics: Minimum Wage

First do no harm.

That’s a life-or-death rule for doctors, who must consider any damage their intended cures may inflict.
If only policy-makers respected this rule. Instead, on New Year’s Day, Ohio, along with 13 other states and the District of Columbia, applied the economic equivalent of leeches – minimum-wage increases – to try to “cure” poverty.

Misguided politicians and citizens in Ohio and elsewhere mandated wage increases because they mistake wages as a cause rather than the effect of the factors that lead to greater income. It is as though we could force winter to begin by defoliating trees. The connection is backward.

Wages reflect productivity and are the product of skills and capital. The intersection of supply and demand, not the balance of greed and fairness, determines wages. Firms will go out of business if forced to pay someone wages that exceed the employee’s output. And they will lose their best people if they don’t treat them as well as their talent demands.

Data from the most recent National Assessment of Adult Literacy highlight the problem. The survey shows 22 percent of American adults have trouble with tasks as simple as determining the cost of soup and a salad from a menu. Among those with this trouble, 57 percent do not work at all, and only 14 percent work full time and earn more than $500 per week.

Ignoring this reality does cause harm. Studies repeatedly show that minimum-wage increases lead to job losses, with the greatest job losses occurring among the least skilled and least advantaged. Among the most recent is a 2007 study from the University of California at Irvine showing that for each 10 percent increase in the minimum wage, employment drops 8 percent for high-school dropouts and 8.4 percent for African-American teens.

The impact of artificial wage increases is well known in the economics profession. When surveyed in 2007, an overwhelming majority of labor economists said minimum-wage increases, like the series of hikes mandated by recent federal legislation, will lead to job losses.

True, someone who “plays by the rules,” works hard, yet still lives in poverty is a compelling target for sympathy. That’s why we already do a lot for people in that situation.

To appreciate the magnitude of help currently extended to poor families, consult the U.S. Department of Health and Human Services’ “Marriage Calculator.” It shows that a family of four with both parents present and a single minimum-wage earner will earn less than the poverty-level income in each of the 14 states that raised their minimum wage Tuesday.
Yet even if the politicians hadn’t changed the old minimum wage, after-tax income for such a family is well above the poverty threshold in all of these states, once assistance from the Earned Income Tax Credit, food stamps, housing subsidies and the Women, Infants and Children program are counted.

Though the calculator doesn’t have the very latest information for every state, it shows an average income boost of fully 88 percent, or nearly double the minimum-wage income. In addition, all four members of the family are eligible for health benefits in 11 of the 14 states.

Helping the poor via these government programs is far better “medicine” than minimum-wage hikes, because it doesn’t waste money on the 86 percent of minimum-wage earners who are not heads of single-earner households. And even better, these programs do not kill jobs for the least skilled workers who badly need employment.

In short, trying to convert entry-level employers into welfare offices is a quack cure that kills jobs, penalizes firms that would hire the less skilled and hurts those who need help the most.