Minimum wages hurt the poor


No one likes to argue against the minimum wage. It makes you sound mean, heartless, privileged. You might have all sorts of considered and logical objections — a higher minimum wage means higher unemployment, a bigger black market, more expensive goods, slower growth, and, in any case, the federal government has no business setting private sector salaries — but your opponents won’t engage with those objections. Instead, they will say, “How would you like to work for less than $7.25 an hour?”

President Biden says he favors the plan, long demanded by Democrats in Congress, to raise the minimum wage in stages to $15 an hour. “No one should work 40 hours a week and live in poverty,” he says, a sentiment both unimpeachable and irrelevant.

The question the United States faces is not whether people who do unskilled and unrewarding jobs should be properly compensated. Of course they should. The question, rather, is whether, in an economy devastated by the lockdowns, with millions of jobs destroyed and with the real value of wages falling, a hike in the minimum wage is the most effective way to help the poor. The answer is that it is not, for several reasons.

First, and most obviously, the minimum wage is a bung from the unemployed to the low-paid. The higher it goes, the less attractive it is for employers to take on staff. Now, there might be a case for going ahead anyway. You might have a Weberian/Protestant belief that work is a virtue and that people should be rewarded for trying to do the right thing, even if there are wider costs. But let’s not deny that those costs exist.

To illustrate the point, suppose the proposal were for a minimum wage not of $15 an hour, but of $150 an hour. Everyone can see that the consequence would be fewer jobs. Some firms would turn to automation: There comes a price point at which it pays to invest in machinery rather than people. Others would look for undocumented workers. Most would simply cease trading.

Supporters of the proposal might respond that they are not suggesting anything so extreme. Several states already have minimum wages close to $15, as do some big employers. Amazon, for example, has set itself a $15 minimum wage policy and is now lobbying heavily for that rate to become statutory. This is less from altruism, one suspects, than from a desire to squeeze smaller competitors.

Still, even a modest rise will have consequences. Imagine, for example, a fast food chain that can either have staff behind the counter or one of those fancy systems where you tap in your own order. At what stage does the company pay the upfront costs of installing an automated system? The answer will partly depend on the wages it would otherwise have to dole out. There will, logically, come a point when the minimum wage pushes all takeaway chains into automating their services, a point that, judged by the number already doing so, is not far off.

Where automation is not possible, firms might respond to a minimum wage hike in other ways. They might, for example, adjust downward or eliminate nonwage benefits — free meals, store discounts, or, most obviously, health insurance.

Alternatively, they might hire the one type of worker who cannot claim the minimum wage: the illegal immigrant. Undocumented workers, by definition, cannot go to court to claim higher wages or, indeed, any social protections at all. Now, you might argue, as Milton Friedman did, that this makes illegal immigrants the most desirable kind of immigrants. But I can’t imagine the congressional supporters of the wage hike having much time for that argument.

Finally, of course, companies will almost certainly end up passing on the extra costs to their customers. That this weakens the economy as a whole is not in dispute. The more people must pay in higher prices, the less they have to spend on everything else. But the negative impact will be felt disproportionately by the poor.

Why? Because, as professor Jeffrey Clemens of the University of California, San Diego, shows in a powerful new study, companies with low-income employees tend also to have low-income customers. If a wage hike pushes up prices in McDonald's or Walmart, what kind of person is likeliest to pay?

The minimum wage, in short, is not an effective way to help the poor. Instead, Biden should ensure that, as the recovery gets underway, firms have every incentive to hire more workers. This means reducing or suspending altogether taxes on employment and investment. As unemployment drops, wages rise naturally and affordably. It might not offer politicians the same opportunity to flaunt their compassion, but it works.

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