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July 2, 2013

Raising the Minimum Wage: Bad Ideas Have Consequences

By

Liberals argue that raising the minimum wage boosts the economy without costing jobs. To which conservatives often respond: then why not really hike it and see what happens?

Venture capitalist Nick Hanauer appears to have taken this rhetorical point literally. He recently proposed raising the minimum wage to $15 an hour. Hanauer predicts this would raise consumption by $450 billion, growing businesses and creating jobs. If only. America has already tried this — and the results were not pretty.

Congress gradually applied the 2007 minimum wage increase to American Samoa, a territory with per-capita income just one-fifth the U.S. average. This equates to a minimum wage of $20 an hour in the continental U.S.

Super-sizing Samoa’s minimum wage did not boost consumer spending, stimulate the economy, or create jobs. It did not even boost pay. Instead, after just three of ten scheduled increases, Samoan unemployment septupled from 5 percent to 36 percent. One of the islands’ two tuna canneries cut benefits and hours while laying off workers and freezing hiring. The other closed entirely. Real wages fell 11 percent as inflation outstripped pay growth. The GAO documented the devastation.

American Samoa’s Democratic Governor harshly criticized this report — for “not adequately, succinctly or clearly convey[ing] the magnitude of the worsening economic disaster in American Samoa.” He begged Congress to call off the minimum wage hikes:

We are watching our economy burn down. We know what to do to stop it. We need to bring the aggressive wage costs decreed by the Federal Government under control. But we are ordered not to interfere. Our job market is being torched. Our businesses are being depressed. Our hope for growth has been driven away. . . .
How much does our government expect us to suffer, until we have to stand up for our survival … American Samoa could be left substantially without a private sector economic base except for some limited visitor industry and fisheries activities.

There is no such thing as a free lunch. The money to fund a minimum-wage hike comes from elsewhere in the economy. It provides no net stimulus. And businesses will not pay workers more than the value they create — at least not if they want to remain in business. Minimum-wage hikes cannot raise workers’ pay above their productivity. They simply prohibit less productive employees from working. Good intentions do not change this reality.

-James Sherk is a senior policy analyst in labor economics at The Heritage Foundation.

First appeared in National Review Online

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