March 4, 2005

March 4, 2005 | WebMemo on Economy

Minimizing Economic Opportunity by Raising the Minimum Wage

Congress is once again considering amending its worst economic law, the minimum wage. After decades of experience, everyone should know that regulating the price of Labor is identical to any other price control and an especially crude way to "fix" free markets. Raising the minimum wage will hurt low-income workers, cost jobs, and hobble the American economy. Congress should know by now that bucking the laws of Economics does not work.

Simple Economics

A minimum wage operates by removing the lowest rung on the economic ladder - it doesn't just take away current jobs, but also future job opportunities. So how many rungs will Congress knock out this time? Senator Ted Kennedy proposes raising the minimum wage by $2.10 an hour. The Republican alternative from Senator Rick Santorum calls for an increase of $1.10. So the two options on the table are a mandatory price increase of 41 percent or 21 percent. The consequences for Labor demand are predictable.

The goal of price controls like the minimum wage is essentially to repeal the law of supply and demand, but senators might as well try to repeal the law of gravity. Worse than folly, disrupting the equilibrium of Labor markets causes economic damage. Although the minimum wage will not work according to economic theory-and it has not worked in reality-what makes it especially tragic is that it hits poor Americans hardest.

A survey published in the Winter 2005 Journal of Economic Perspectives, an academic publication, reports that 71 percent of economists at America's top universities agree with the statement "a minimum wage increases unemployment among the young and unskilled." About one-third of the economists agree outright, and another third agree with reservations. Think about that: the consensus among top economists is that the very existence of a minimum wage harms those who, according to its supporters, need it most.

The notion that increasing the federal minimum wage will push up real wages is also fiction. Average pay in America has been increasing steadily in recent years, despite the fact that the minimum wage has not changed since 1997. Real wages rise when productivity rises. Labor productivity has gained 26 percent since 1997, and real earnings for non-supervisory workers are up 7 percent. Non-wage benefits are up as well, especially returns to risk-taking entrepreneurs. The credit for these gains goes entirely to the workforce and American business, not to micromanagement from Washington, D.C.

Let Federalism Work

If Congress really wants to fight poverty, it will give Americans more market freedom, not less. Start by holding hearings specifically about the minimum wage, and ask why this failed policy is allowed to continue.

Specifically, why are the states not allowed the flexibility to set their own minimum wages? States set their own speed limits, even though cars are the same everywhere. So why can't states set their own minimum wages, when other prices vary widely across regions?

An improved minimum-wage law would allow each state to have a unique minimum wage, with no limits on how high or low it could be. Let New York try $15.00 an hour, and when its economy stagnates the example will shine brightly for the other 49 states to learn from. When Ohio sets a minimum wage lower than the current federal minimum of $5.15 and reaps a boom in growth, the world will take note. The whole point of a federal system is that diverse states can experiment. The system is designed for learning, and Congress needs the courage to allow that experimentation.

A New Approach

Any vote to increase the minimum wage should be cast with the full knowledge that it will intentionally hobble the U.S. economy -- especially the capacity of the economy to generate prosperity for the least skilled among us. Many workers will get a nice raise, but Congress shouldn't forget those others who will lose jobs and be unable to find work.

Instead of playing defense on the minimum wage, it is time for the members of Congress who profess belief in the free market to try a new approach. It is time to fight for an end to the federal minimum wage altogether. Put its advocates on their heels and make them defend their outmoded economic assumptions. Bring in the expert economists from MIT and Chicago and Harvard who will force Sen. Kennedy to hear that his policies are hurting the poor. Challenge the opponents of competition to explain themselves.

Raising the minimum wage would be an outright disaster. Simply defending the status quo on the minimum wage is a failure of imagination.

Tim Kane, Ph.D., is Bradley Research Fellow in Labor Policy in the Center for Data Analysis at The Heritage Foundation.

About the Author

Tim Kane, Ph.D. Visiting Fellow
Center for Trade and Economics (CTE)