Why Low Minimum Wages Kill Jobs and Crush Living Standards for Everyone
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Senator Tom Harkin, Democrat of Iowa, has introduced a bill to raise the federal minimum wage to $9.80 from its present level of $7.25. Polls are showing many voters in favor, though they are confused about what it would mean for the job market. The truth is that a move would be good for a slow economy and have a positive impact on the jobs crisis. Naturally, this has led to the usual cries of opposition, largely based on the notion that raising the minimum wage hurts the very people it is supposed to help. Typical of this view is a letter to the New York Times from Michael Saltsman, a fellow at the Employment Policies Institute, a business-backed nonprofit research group (surprise!).
Saltsman trots out the old canards against the minimum wage, claiming that research indicates that a minimum wage increase "simply doesn’t help the poor — in fact, it hurts them." He cites studies which showed that states with their minimum wages between 2003 and 2007 found no associated decline in state poverty rates. Saltsman gives three reasons for this:
- A majority of working-age individuals who live in poverty don’t work, and thus cannot benefit from the raise.
- A clear majority of those who do earn the minimum wage live in households that aren’t in poverty.
- Less skilled and less experienced employees lose employment opportunities when the cost to hire and train them rises as a result of a minimum-wage increase.
Let’s take these arguments in turn. Implicit in the first point is that a majority of working-age individuals don’t work because they choose not to (i.e. they are lazy scroungers), or because unemployment is caused by laziness or lack of training. The argument they often use is that “I can get a job, therefore all the unemployed could get jobs if only they tried harder, or got better education and training.”
The way I go about demonstrating that fallacy is a dogs-and-bones example. Say we have 10 dogs and we bury nine bones in the backyard. We send the dogs out to find bones. At least one dog will come back without a bone.
We decide that the problem is lack of training. We put that dog through rigorous training in the latest bone-finding techniques. We bury nine bones and send the 10 dogs out again. The trained dog ends up with a bone, but some other dog comes back without a bone (empty-mouthed, so to speak).
The problem is that there are not enough bones and jobs to go around. The “bones” in the jobs discussion are insufficient spending power in the economy. It is certainly true that a well-trained and highly motivated jobseeker can usually find a job. But that is no evidence that aggregate unemployment is caused by laziness or lack of training. And besides, we could easily determine how much unemployment is truly voluntary. The government could serve as the “employer of last resort” under a job guarantee program modeled on the WPA (the Works Progress Administration, in existence from 1935 to 1943) and the CCC (Civilian Conservation Corps, 1933-1942). The program would offer a job to any American who was ready and willing to work at the federal minimum wage, plus legislated benefits. No time limits. No means testing. No minimum education or skill requirements.
It's hard to believe that reducing or even eliminating the minimum wage (which is the corollary of Saltsman’s point), would actually enhance employment, when the problem is a basic lack of demand. Business will not hire more workers until it has more sales. Consumers will not spend more until they’ve got more jobs. A private-sector recovery requires 300,000 new jobs every month. But the private sector doesn’t need 300,000 new workers per month until there exists sufficient spending power in the economy to induce them to hire those workers. How is retaining a static, or reduced minimum wage, going to achieve this?
Higher wages means higher income and thus higher consumption spending, which induces firms to employ more labor. So the truth is that economic theory does not tell us that raising minimum wages will lead to more unemployment, indeed, theory tells us it can go the other way—raising the minimum wage could increase employment. That’s one of the reasons why Henry Ford believed in paying his workers a decent wage: so that they could buy his product.
To be sure, even an increase in the minimum wage to $12 or $15 an hour is not going to provide the means to purchase a Ford (or GM) today. And so what if, as Saltsman argues, the workers earning this minimum wage are not living in poverty? Does that mean they wouldn’t spend the money derived from an increased minimum wage? I wonder if Saltsman would also argue that tax cuts across the board are unnecessary because most of the people who receive them are not living in poverty?