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Minimum Wage, Maximum Harms

It is difficult to pinpoint the worst part of the President’s stimulus package moving through the new Congress. There is its gargantuan size—$1.9 trillion—far more than President Obama’s $900 billion stimulus for the financial crisis. And then there is the disproportion of its size to the magnitude of the crisis. Obama’s stimulus reflected about half the projected fall in output from the post-financial crisis recession while this one provides three times the projected output shortfall of the Covid recession. It’s as if the government is playing with Monopoly money—oblivious to the additional taxes or inflation that will be necessary to extinguish the additional debt. Excessive stimulus today means less liberty tomorrow.

And then there are the dubious objects of the government’s solicitude. While a small proportion of the money goes to the necessary delivery of Covid treatments and vaccines, much of the rest amounts to handouts to people, regardless of whether their income has been affected by the crisis, and bailouts to states, regardless of whether they have managed their finances wisely. The stimulus is largely a cover for redistribution—to citizens making under $75,000 a year and to the largely blue states who have mismanaged their finances. Like all redistribution, this part of the stimulus encourages consumption over investment, but this one also incentivizes state profligacy. The President is not letting a crisis go to waste. He is using it to creates more crises.

But the worst proposal currently in the package is that calling for a $15-an-hour national minimum wage. This doubling of the current federal minimum strikes at liberty and federalism. It harms the least able in society by depriving them of the dignity of work. It flies in the face of both economic theory and empirics. It is an offense against principle, equity, and knowledge. 

Liberty

Government should restrict action when individuals and businesses are interfering with the liberty of others by imposing costs on them. (Regulation of pollutants, for example, is therefore justified.) But what costs does it impose on society if a business provides someone a job at a mutually agreed upon wage? Presumably, the worker cannot find a job paying more than $15 an hour that he likes better, or he would already be working at it.

Some have argued that businesses may have monopsony power or are colluding to artificially hold down wages. If that is the case (and it is rarely so given the wide range of businesses that compete for unskilled labor), competition law can take aim at any collusion or monopsony that depresses wages.

The Biden approach to the $15 minimum perfectly captures the evils of centralized government—a one-size-fits-all approach that does not recognize the diversity of endowment and circumstance.

And if society believes that some people deserve a higher income than the value of their work provides, they can supplement wages through government support. The earned income tax credit does just that without distorting the price of labor. But a minimum wage law interferes with the discovery of the efficient wage that comes from voluntary bargaining between employers and employees.

Federalism

Even if a minimum wage were justified, it should be imposed at the state or local level, not by the federal government. The cost of living differs substantially in different parts of the country. The median wage also diverges among the states. In Montana and Mississippi, it is lower than $15 an hour, and the median in several other states hovers right around $15. By contrast, Connecticut has a median wage of over $30 an hour.

A recent study illustrates that the hike will have much more destabilizing effects in lower-cost and lower-wage areas of the nation. A high national minimum wage sabotages businesses in rural red states. That may be a feature, not a bug. The party imposing it on a party-line vote will never be elected there, and it is antagonistic to these states’ welfare.

Some defenders of the minimum wage hike, like The Economist‘s “Free Exchange” columnist, recognize that a minimum wage will crush jobs in these areas. Nevertheless, their argument in favor is that it will force many people to move from low-paid areas to places where they would become more productive. But some people may prefer to stay in a community with long-standing ties or other pleasures rather than be forced elsewhere to earn a higher wage. The columnist’s enthusiasm for central planning at the expense of individual choice demonstrates how far The Economist has traveled from the classical liberal magazine of Walter Bagehot to one often indistinguishable from the rest of the left-liberal media.

The Least Advantaged

The minimum wage will have the worst permanent effects on those with the lowest endowments. Some people are limited in cognitive ability. Others are disabled. The higher minimum wage will put many in these groups permanently out of a job because their value to a business is lower than $15 an hour. The minimum wage is a message of contempt for their dignity and, indeed, their happiness, as it is well known that long-term unemployment is deeply depressing. Welfare is no substitute for work to the many who want to contribute to their own support.

Young people too will lose the opportunity to gain skills and discipline because few businesses will want to put untested, unskilled workers on the payroll at this wage. The result will likely be more crime and less opportunity to move up the economic ladder, particularly from the communities where families provide neither the stable environment nor the authority figures that early participation in the workforce may offer.  

One of the striking features of the Biden plan is that it eliminates a lower minimum wage for the disabled and the young—a difference that would temper the baleful effects of a flat minimum wage of these groups. Thus, the proposed regulation fails to take into account not only differences in locality but also obvious differences among people. The Biden approach to the $15 minimum perfectly captures the evils of centralized government—a one-size-fits-all approach that does not recognize the diversity of endowment and circumstance.

Science

In her testimony to become Secretary of the Treasury, Janet Yellen stated that that the minimum wage hike would have a minimal effect on jobs. But that is not what the economic literature says, even for wage hikes far less radical than this one. Yellen herself said something different before she became a saleswoman for Biden. And the chief salesman for the Biden administration—Biden himself—claimed that “all economics” shows that the economy will grow because of the minimum wage. In fact, almost no economist believes it will boost output.

Science cannot dictate policy. But it is unacceptable as a matter of science or morality to deny this brutal fact, and it does no favors for those who will be left unemployed by this minimum wage hike. It is sad that a media that gleefully exposed any false claims of the former President is almost entirely silent when our current President proclaims a version of economics that is a politically driven fantasy.  

Reader Discussion

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on February 18, 2021 at 08:16:12 am

Excellent piece!

For anyone who doubts economic science shows that the minimum wage causes unemployment, NBER just released (Jan. 2021) a paper by Neumark and Shirley that shows economic research overwhelmingly finds unemployment effects, and - unsurprisingly - less skilled and less educated people are the primary victims of this disgusting policy.

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Charles N. Steele
on February 18, 2021 at 11:53:17 am

I consider Professor McGinnis to be one of the better essayists at L&L, as his output is usually relatively short, to the point, and difficult ideas are well explicated. But given the past output of Thomas Sowell and others over the last few DECADES(!!) on this topic, I was thinking, "why are we reading yet another diatribe against the minimum wage?"

If the message has not sunk in, hit home, and become settled economic "science" by now, those people proposing such things must be purposefully obtuse or villainous in continuing to advance this obvious vote buying scheme. Unfortunately too many of the people to whom this program is directed don't have the ability to recognize that as their absolute wage increases, their relative wage vs. costs of living will (at best) remain the same. And of course Dr. Sowell has already shown that the real minimum wage is $0.00/hour.

So where are the fiscal conservatives, supply siders, GOP, GOPe, et al? Why have they not published a major counter argument to this villainy? Some document explaining all of these flaws and signed by 50 Republican Senators and 200+ House members, coupled with several dozen name brand economists, might at least alert the middle and lower class enthusiasts for this bill that reality will be different than they expect. And that the Democrats/ Progressives/ Leftists are laughing at how easy it is to confuse and deceive these groups with nice sounding propaganda. So that when the outcome we can now perceive becomes more visible to those classes, we can fully lay blame for unemployment at the feet of the (elections have consequences) Democrats.

One can dream, anyway.

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R2L
on February 21, 2021 at 09:51:49 am

Diatribe? And, as Milton Friedman and others who have left their written ideas for later generations to consider, the message about the unintended but corrosive power of a government and its vote getting policies bear repeating.

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Gary Mullennix
on February 18, 2021 at 10:03:26 am

The most effective part of this argument, I think, is the section on loss of work opportunities for the young. While I don't disagree with much of the substance here, I've got to register a textual grimace at the sections on the "dignity" of work. Some work is dignified, some isn't, and that depends a lot on one's life circumstances. I've worked any number of low and minimum-wage jobs (back when it was around 5 bucks an hour). There was nothing "dignifying" about that work, as opposed to unemployment. What dignity there was in those jobs, consisted in the fact that I was on my way to doing something else. For people who are going to be stuck more or less permanently in these kinds of jobs though? I'll register my doubts as to whether this kind of dignity is worse than the indignity of unemployment. Society as a whole may be better off, if some people are stuck in permanent minimum wage conditions. But lets be honest enough to make that argument, and not pretend like there's more dignity than there is, here.

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Aaron
on February 18, 2021 at 12:14:57 pm

Yes, dignity. A slippery concept. It is self evident that we are all created equal, ... and self evident that we are not. One small benefit of the pandemic has been to highlight that there are many essential jobs out there that at first blush might be considered low in dignity. Until there is no one available to perform them. Hopefully the many of us who are beneficiaries of such jobs can view them as having more dignity and necessity than we might have previously.

Many years ago I was in conversation with a social worker about Social Security. He pointed out the reason SS was set up as an "insurance" program with a pay-as-you-go feature* was to preserve the "dignity" of SS recipients as receiving the output of "their accounts" rather than just getting a welfare handout from society or the government. I suspect that most claimants in the 1930's, 40's, and maybe 50's realized they were getting close to "something for nothing". But as time passed the "head fake" was working and no one any longer realizes that if they could have taken their payroll taxes and invested in a 401K/ IRA equivalent, they would typically be money ahead by the time they retired.

*Pay-Go: something I read somewhere that even FDR was against or at least skeptical of?

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R2L
on February 18, 2021 at 12:23:17 pm

That is interesting, about FDR. I'll have to look into that.

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Aaron
on February 18, 2021 at 17:58:33 pm

Yes, dignity. A slippery concept.

I would suggest that the issue appears slippery because of matters of scope. The concepts of "work" and "dignity" are themselves immense subjects that intersect in multiple ways and with regard to multiple considerations. I am not particularly vexed by Professor McGinnis's use of "dignity of labor," nor do I think that Aaron is out of line in objecting to the generality.

We can begin with a few general observations about labor. We note for example that extended periods of unemployment are correlated with increased rates of depression and other undesirable psychiatric phenomena. We also observe that a significant demand of women's rights activists was for greater access to employment opportunities. Certain occupations are themselves associated with higher degrees of social status and esteem, merely by the nature of the work with which they are associated. An occupation is historically associated with one's identity. Many surnames, for example, are simply descriptions of an occupation: Cooper, Baker, Farmer, Fisher, Fletcher, Carpenter, Smith, etc. Look up any biography on Wikipedia, and whenever parents of the subject of the entry are mentioned, their occupations are usually given. To the extent that having an occupation involves working, work is involved with social standing. We may also note that sloth, one of the seven deadly sins, represents a set of attitudes contrary to work. In short, at least certain aspects of working and having a job are associated with personal concerns such as metal health, self-esteem, social status and, conceivably at least, dignity.

There are several distinctions to be made within the idea of work, or more specifically, labor. We tend not to associate the same degree of dignity with forced labor as we do with a person thriving in a chosen career. <Arbeit macht frei has a different connotation in terms of the dignity of work than does Stephen Hawking's observation "Work gives you meaning and purpose and life is empty without it." There are a number of distinctions that can be drawn that identify discriminants between dignified and non-dignified work. Some work is socially valuable, some is not. Some crimes require a great deal of work. Some work provides a sense of accomplishment wholly apart from remuneration, and other work does not.

One reason why the ideas of work and dignity are not straightforward is that they touch on other areas such as duty and justice. As regards the difference between working and being on the dole, John Stuart Mill claimed "By becoming dependent on the remaining members of the community for actual subsistence, he abdicates his claim to equal rights with them in other respects." Catholic social teaching has devoted a great deal of thought to the dignity of labor, as described in encyclicals from Rerum Novarum through Laborem Exercens. Labor, or toil anyway, was addressed in Genesis. It was obviously a topic of concern to Marx and Hegel and Adam Smith. It is in fact a complex, and highly human topic, and for this reason alone, it is worthwhile to ask whether particular government policies affect labor. But it is also worth noting that the notion of human dignity is likewise a complex and highly human topic and deserves at least as much consideration in policy discussions.

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z9z99
on February 18, 2021 at 12:52:13 pm

Depending on what is displayed in the "Related Essays" listing on the L&L web page when you view today's essay: I was snagged by the title of the 11/10/15 essay by Micael S. Greve, "Dedicated to an Important Half-Truth" ( https://lawliberty.org/dedicated-to-an-important-half-truth/ ) to explore it further. It discusses inequality, so it is "related" to today's essay. I recommend you explore it as well.

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R2L
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