The appeal of the minimum wage is really very simple: Everyone likes higher wages. Wage increases mean more money in your pocket, which takes a load off your mind. Politicians' primal impulse is to give stuff to voters, and few gifts are more welcome than a mandated pay increase courtesy of your elected representative.
The minimum wage also has another appeal, which is only slightly more subtle: More money in your pocket means more spending. More spending puts money in other people's pockets, which leads to even more spending. A government-mandated wage increase therefore appears to generate an ever-expanding virtuous circle that boosts the entire economy. Not surprisingly, the idea that you can legislate your way to prosperity is alluring to a legislator.
In his State of the Union address, President Obama called for an increase in the minimum wage to $10.10 nationwide. Mary Burke, with characteristic boldness, originally supported a 35-cent increase in the minimum wage to $7.60 before changing her mind and deciding that $10.10 was the magic number. Burke, along with many of her supporters, believes this value is more consistent with "livable" wages.
But if higher wage levels support a higher standard of living (and they do), why stop there? A full-time worker earning the minimum wage would make about $21,000 a year, which is not exactly living large. If it really wants to increase disposable income and consumption-driven growth, the state should establish wages that put real cash in your billfold -- say, $50 an hour. That works out to a minimum of $100K for every man, woman and child (or, more precisely, teenager) in the labor force. Now we're getting somewhere.
Anyone see a problem with this scenario? Of course you do; if your employer is forced by law to pay $100,000 for everyone he or she hires, it would hire a lot fewer workers. If you're one of the lucky ones who is hired, chances are you'll see a pay increase. If not, you're out on the street.
This example is extreme, but it's not ridiculous, because the same logic applies to any increase in the minimum wage. The simple, undeniable economics are that forcing employers to pay more for labor means that they will hire less labor. It may not happen immediately, but over time there will be less employment among firms offering minimum-wage jobs. Politicians will tout the visible pay increases that result from higher minimum wages, but they ignore the costs of this policy that are not seen: the jobs that would otherwise have been created but are lost.
These costs are substantial. The nonpartisan Congressional Budget Office estimates that a $10.10 minimum wage could reduce nationwide employment by 500,000. Even more perniciously, these job losses will be borne disproportionately by the most vulnerable segment of the labor force: young minority workers. The current unemployment rate for black teenagers is 32.4%, compared with 6.7% overall. These willing workers need more employment opportunities, not less, but that is exactly what a higher minimum wage would deliver.
This consequence undermines Mary Burke's claim that a higher minimum wage will reduce dependence on government assistance. Her argument is that a minimum-wage increase would enable people to live off their earnings rather than rely on food stamps and other government programs. While this is a laudable goal, it is obviously possible only for people who are employed, and raising the minimum wage will reduce this number.
More fundamentally, Burke apparently fails to recognize that a state-mandated minimum wage is an example of "government assistance." It is clearly an exercise of government power intended to "assist" designated beneficiaries. But it will do so only at the expense of reducing the jobs available to others.
The minimum-wage earners who remain employed will benefit, but this will be a small segment of the population. Only 4.7% of the workforce works for wages that are at or below the minimum wage, down from 15.1% in 1981. Moreover, 32% of these workers (or 1.5% of the labor force) are full-time employees, 68% are part-time employees and 55% are between the ages of 16 and 24. A higher minimum wage would therefore largely benefit part-time, younger workers who are unlikely to be the primary breadwinner in their family.
Is there a better way to assist low-wage workers without destroying job opportunities or undermining the incentive to work? Yes: The earned income tax credit is targeted at the working poor, and it boosts earned wage income. The program has been effective in lifting millions of people out of poverty, and it can be refined and expanded to benefit others. This approach would be more effective than increasing the minimum wage, which pulls the bottom rung of the employment ladder away from the people who need it most.
Larry Kaufmann is an economic consultant based in Madison.