The Mystical Power of the Minimum Wage

President Obama would like to see the federal minimum wage to go to $9.00 per hour from $7.25. Representative Pelosi wants $10.10. Senator Warren has spoken of $22.00. What thoughts are behind this movement?

In real terms (that is, adjusted for inflation), the federal minimum wage would be $10.52 today if compared to the period of the highest real minimum wage. Similarly, if you compare the minimum wage to average production worker wage when the minimum wage was highest, then the minimum wage would be $10.01. Finally, if you made the minimum wage track the growth of productivity, then the minimum wage would be $22.00. But what is wrong with all this?

The gain in productivity since over the last 45 years has not been associated with the increase in the ability and skill levels of labor. As a result, increased compensation has had to be directed toward technology and management, the source of productivity gains. But why wouldn’t you want today’s minimum wage to reflect the highest minimum wage found in the past? Well, this might reflect the worst possible situation . . . not the best. That is, the highest minimum wage to date represents the greatest suppression of employment opportunities for the lowest skilled workers.

This brings us to the nearly universal thought among economists. The law of downward sloping demand indicates if you fix wages at a higher level than the market the consequence is that fewer workers are hired. It is unlikely that the government can suspend the law of demand, because it is a natural law . . . and not a governmental statute. So raising the minimum wage results in fewer people who are employed at the low end of skills. Now there may be a few more hired and few more paid more at a somewhat higher level of skill. Hence the reason unions are for higher minimum wages. However, few economists believe that higher minimum wages help the very people that they are intended to help, the workers with the lowest skills.

There appears to be a new/old thought starting to creep into the minds of some left-leaning economists. This idea is that the minimum wage should be considered as a macroeconomic policy . . . forget the microeconomics (the law of downward sloping demand). The idea is that if some workers are paid more then benefits accrue to the entire economy by way of a Keynesian multiplier effect. OMG. Filtering down from the left wing.

It is common for talking heads to observe that the minimum wage is not a living wage. That is, one cannot provide all necessities for a family with a single minimum wage. True enough. But this does not suggest what should be done. For example, is no wage at all superior to the current minimum wage or a market wage? Are workers at the low end of skills required to provide all necessities for a family? Well-to-do young people often live in college dorms with roommates. Shouldn’t poorer people also expect to live with roommates to lower the cost of housing? Even though I worked during college, I lived in a dump with roommates, cooked almost all my own food, and could not buy a new pair of shoes (or any clothing or furniture) during that period. In fact, I gave almost no thought to my own poverty during this period. Of course, my poverty was not sustainable. I could not afford to take care of all the needs of a family let alone myself into the future. My expectation was that when I hit the full time labor market after college I would be equipped to earn a living wage. In fact, I consciously designed my program in college to gain the skills to become employable at a reasonable wage. I am not suggesting that everyone should go to college. Instead, everyone should take the responsibility to live inexpensively while gaining the skills necessary to get a good paying job. On the job training is, in some ways, the very best training there is. Young people lacking skills should try to get any lawful job they can get regardless of whether or not the wage is a living wage. While they are in such a job, they should try to learn as much as possible about the work so as to make themselves indispensable to their employers. This is the solution to the problem of low wages.