Monday, February 24, 2014

Increasing minimum wage: A policy to increase unemployment

It’s a basic economic principle that when you create a price floor, inefficiency is created. Another basic principle is when you tax something, thereby artificially raising its price, you get less of it. If the government one day determined that hotel and motel owners simply don’t make enough per room and passed a law that determined no room shall be rented for less than $150 per night, then people who prefer less expensive accommodation that typically is of lower quality, such as Motel 6 or Super 8, with less service will be far less likely to stay in hotels, though it’s unlikely that the brands on the lower-end of the quality spectrum will even be able to stay in business while the brands whose rates are near or about $150 would not be similarly impacted.

This is exactly how a price floors impact any good that is bought and sold, include the most basic good that most people have to sell, their skills and abilities. Paul Krugman’s text, Microeconomics in Modules, says: “Just like price ceilings, price floors are intended to help some people but generate predictable and undesirable side effects.” One of the most significant of these effects is surpluses. The government has had price floors in place for many agricultural products since the 1930s, which creates surpluses. To prevent surpluses, the government then has to create other programs to attempt to solve the inefficiencies created by its original programs. In the case of agriculture, the government buys the excess product, which is a wasted resource or it pays farmers not to grow food. In the same way, the government pays employees not to work through “unemployment” and various other government programs.

Despite this common knowledge, President Bush’s law raising the minimum wage by 41% was fully implemented in 2009 and now President Obama is lobbying for another 39% increase to $10.10 per hour. The President doubled down on this populist plan during his weekly radio address Saturday, despite a report from the non-partisan CBO only a few days earlier that states: “Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by about 500,000 workers”. This is exactly what we should expect from an elevated price floor.

But what is perhaps most concerning is that the President is selling the increase in the minimum wage as an anti-poverty and fairness tool. However, the CBO report also points out that:
The increased earnings for low-wage workers resulting from the higher minimum wage would total $31 billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families earning more than three times the poverty threshold.
Once again we see a government policy with good intentions—in this case, reducing poverty—that doesn’t do what it purports to do. In this case, it is because a majority of people making minimum wage are under 25 years old and likely living at home. Precisely, of those who make the minimum wage, 50.6 percent are ages of 16-24 and 24 percent are 16-19!

Increasing minimum wage will merely hurt those who most need entry-level jobs by reducing the number of jobs available. This means as a society we are intentionally keeping people who want to work from working, which in itself has even greater negative societal impacts.


  1. I still am trying to figure out if they understand the whole concept of opportunity cost, if they know about it and don't care? Or if they really do believe the whole concept of "the big lie" that is so prevalent among those that subscribe to Sal Alinsky's Rules for Radicals, that if you tell the lie enough it becomes the truth, because it would have to be true to be repeated so often.

    Santa Fe just raised the min wage to over $10 this last year, in addition to enacting a ban on plastic shopping bags (which is a whole other issue that is eating at me right now), but I am waiting to see the real fall out of the min wage here. For the most part Santa Fe is a town of very poor people, ruled over by the Whole Foods crowd who have NO idea how the other half lives.

    I am just waiting to see what line of bull they give when this min wage goes into effect (nationally and locally) and what they will say when the jobs start being lost. What excuse will they give us?

  2. The minimum wage is a liberal ploy to make it look like they care for the little guy. They don't care if it puts people out of work!