The $15 Minimum Wage – Money From Heaven

UnknownDo you favor a $15 minimum wage? Nobody asks where the money comes from. Heaven, I guess.

We’re told that if you give low wage workers more cash they’ll spend it, great for the economy. As though it’s free money.

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Or else the money is imagined to come out of business profits. When pigs fly. It will actually come from higher prices. And since low wage industries (like fast food) often serve poorer people, the extra money earned by low wage workers will ultimately come from . . . low wage workers.

Economics 101 says that when prices rise, demand falls. Raise the price of low skilled labor, and businesses will buy less of it. They’ll seek ways to automate instead (more self-service checkout machines if cashiers become too expensive, for example), which is already happening. imagesHigher minimum wages can only accelerate that – bad news for low skilled workers – who, once unemployed, often stay unemployed.

People imagine businesses can just pay more because they have profits to spare. In reality, profit margins tend to be pretty thin – like around 3% of sales for supermarkets. There’s no room for fat because in a globalized economy every business competes with every other. McDonald’s doesn’t compete just against Burger King and Wendy’s, but every other food option including home cooking – and indeed against every other conceivable product people could decide to buy in lieu of big macs. So prices must be kept as low as possible. Force prices up, due to higher minimum wages, and a business may become non-competitive. Bye bye jobs.

Yet defying this economic logic, advocates of higher minimum wages claim studies show they don’t actually kill jobs. Maybe so – in the short term at least – and if the rise is small, staying under 50% of median wages. But $15 would double the minimum wage, to 77% of the median. The long term impact on low-skill jobs is frightening.

Unknown-3We’re also told government is in effect subsidizing businesses like McDonald’s, that don’t pay a living wage, with food stamps and so forth filling the gap. That’s twisted logic. After all, plenty of people who get food stamps earn nothing. So you could equally say McDonald’s payrolls actually reduce what government must provide. Anyway, we give food stamps, and other welfare, because we as a society deem it the right thing to do. We shouldn’t expect (or force) private companies to do that for us.

In fact, higher minimum wages are an ineffective way to combat poverty. The Congressional Budget Office estimates that only 20% of the income benefits would go to those below the poverty line. (Most minimum wage workers are not primary family breadwinners.) So programs like food stamps, and the Earned Income Tax Credit, are much better targeted for helping the poor – without pricing low skill workers out of the market.

But New York State is currently in a paroxysm of political pandering on this issue. Governor Cuomo set up a board to assess fast food minimum wages. Legions of workers duly came and testified that $15 would be peachy. The outcome was pre-ordained. Our local Times-Union has denounced it – because the $15 wage will be phased in, not immediate!

Never mind the absurdity of singling out one category of jobs (and, unfairly, only in chain restaurants). Or how “fast food” can actually be defined. Unknown-4Or that New York, due to high taxes, already high unionized wage costs and other costs of all kinds, and the most burdensome bureaucratic regulation, is just about the least economically competitive state in the union, making large swathes of upstate into job deserts.

Politicians in this free-money fantasyland will never have to answer for the economic consequences. Voters won’t connect the $15 minimum wage with unemployment higher than it would otherwise have been. Just as public officials don’t answer for all the other ways they’ve run the state’s economy into a ditch. Indeed, the resulting tough economic conditions just encourage more populist politics, preening “compassion” and doubling down with yet more of the economic follies that got us here.*

I too have compassion for fast food workers, and wish they could earn more. It’s a hard life, and I’m lucky to be spared it. (Though I did work one very crummy job in my teens.) But the answer is not to wave a magic wand and expect Heaven to cough up the cash. Instead it’s to stop making it harder and costlier for businesses to operate. images-1And to make sure more people get the education they need for decent jobs – at least finish high school (too many don’t). A key reason fast food jobs pay so little is because there’s a vast oversupply of poorly educated people to fill them.

* Like rent control — more effective than bombing for destroying affordable housing.

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6 Responses to “The $15 Minimum Wage – Money From Heaven”

  1. Lee Says:

    Personally, I think a negative income tax … a growing tax refund the smaller your income is … would be more effective than a minimum wage. Unfortunately, the negative income tax does not appear to be on the table.

    The minimum wage increase will benefit those who are earning the minimum wage more than the price increases will hurt them. With more people able to spend, the economy and the “average” person will also do better. However, of course there is no free lunch. Those hurt are not so much the businesses, which will pass on the costs through the aforementioned price increases, but those who are poor and who are not directly benefiting from the increase in the minimum wage. This includes retirees, those who already earn $15/hour but have many dependents, etc.

    Don’t forget that the minimum wage also serves a purpose independent of economics. Our constitution explicitly bans indentured servitude, a practice where seemingly willing people sell their labor for much too cheap. As we have become a richer society we can afford to raise the bar a little … and that manifests itself in the minimum wage. The thinking is that those who accept less than $15/hour do so out of desperation and are not willing economic actors in a positive sense (much as emerging from a desert and having to trade your life savings for a glass of water is not willingness in the positive sense).

    Personally, I find the minimum wage a little too problematic and would much rather see a negative income tax. Will you work with me to replace the minimum wage with a negative income tax?

  2. rationaloptimist Says:

    Milton Friedman advocated the negative income tax long ago as far preferable to the crazy-quilt mishmash of measures supposedly aimed at poverty. The government should simply send everybody — everybody — one check — and get rid of every other safety net program. For those who already have non-poverty incomes, the check would be cancelled out (in part) by the higher taxes they’d have to pay. But the overall cost to society would be greatly less, so even they would have a net benefit.
    Will you work with me to replace ALL those programs with a negative income tax?
    (Note, the EITC already does work as a sort of negative income tax)

  3. Jorg Lueke Says:

    These are the kind of issues where having an open society and a democracy are critical. I certainly don’t have the answers on how the whole economy works. I personally don’t believe any human is worth millions or billions of dollars especially when there is poverty. But we vote, some laws change, we observe the results, and go back to voting. When I was single I calculated I needed $12/hr to get by and that was almost twenty years of inflation ago. So I can definitely see that less than $15/hr can only work for dependents.

  4. Lee Says:

    Yes, let’s replace all/most poverty programs with a negative income tax.

  5. bruce Says:

    sort of sad when a self serve check out device has a better personality than the one emitting co2.
    Could it be that some people just don’t have what it takes? No drive, no personality, no interest other than not being there. Is that a failure of business or genes?

  6. rationaloptimist Says:

    I don’t knock low wage workers. Mostly they are hard working decent human beings. It is unfortunate when people don’t have the education/skills to do better.

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