Decision ‘08

Dean’s Minimum Wage Hike - Or, How To Screw Your Own Constituency

It will come as no surprise to anyone that the poor tend to vote Democratic. One doesn’t need to resort to stereotypes or racial profiling to explain this - the Democrats have done a good job over the years in convincing the less-well-off that their best hope is governmental assistance, and the types of programs that are aimed at social relief have been largely the province of Democratic administrations: The New Deal, LBJ’s War on Poverty, etc…

It’s a bit perplexing, then, and unexplainable on many levels beyond pure pandering, that Democrats constantly reach for the rhetoric of the minimum wage. We owe the popularity of this old saw to economic illiteracy, no doubt, for the minimum wage is no friend to the poor.

The harmfulness of the minimum wage is not just a talking point of mean ol’ conservatives:

A survey in the Winter 2005 issue of the Journal of Economic Perspectives reports that exactly two-thirds of academic economists at top universities agree with the statement, “a minimum wage increases unemployment among young and unskilled.”

How so? Bear with me as I regress to my college years when I earned a B.A. in Economics.

In a static economic model, the supply and demand curve rules all. A market in equilibrium is one in which supply and demand intersect. All things being equal, then, an artificial price floor, such as the minimum wage, moves supply and demand out of whack. As wages rise, more people are willing to work (I might not scrub floors for $5 an hour, but I might for $10, particularly if I were new to the labor force or living in poverty). However, by increasing the cost of labor, the demand curve has been negatively impacted (I might have a thriving floor-scrubbing business if I only have to pay $5 an hour - the business may be untenable with labor costs of $10 an hour). The result? More labor supply chasing less jobs, and a decrease in wages, overall, in real, aggregate terms.

A dynamic model complicates things. Dynamic models recognize that all things aren’t equal. There is a corresponding increase in purchasing power for those workers whose wages are lifted by the new, increased minimum wage - however, there is also a decrease in purchasing power for those who are thrown out of work. Whether all these things taken together result in a net positive or negative impact on GDP is, of course, open to debate and depends on many factors, such as the size of the economy, the existing unemployment rate, the size of the wage increase, and so on and so forth.

To be sure, for those lucky enough to stay employed, but with a higher wage, there are real, tangible benefits, and no one would argue, I hope, that a family can live any kind of life worth living on the minimum wage. The question, however, is how to increase real wages across the economy, and the answer is to encourage economic activity. As the number of jobs increases, the demand for labor increases, driving wages up. A healthy economy is the best way to help the working poor. For example:

The minimum wage fell about 29% in real terms between 1979 and 2003. Yet real wages have risen in the free market anyway, with real hourly earnings up by 7% since 1997.

Why? Because the GDP of the nation has risen dramatically over the same period, and demand for labor has outweighed supply by a decent enough margin to drive wages up.

What should be a matter of economic policy has, unfortunately yet inevitably, become tainted irrevocably by politics. The truth of the matter is this: by freeing up capital for productive uses, capital that is yearning to be employed profitably, President Bush’s tax cuts have done far more for the working poor of America than any arbitrary minimum wage hike ever could…

4 Responses to “Dean’s Minimum Wage Hike - Or, How To Screw Your Own Constituency”

1 Fred Says:
April 23rd, 2006 at 5:22 pm
The first couple of steps on the economic ladder are really lousy, not matter how you describe them. A higher minimum wage just knocks those steps off, which is no help for those on the ground level.
However, it does have other effects on the wage scale. It also is a goad to mechanize low-wage jobs. (I.E., instead of hiring 10 people to sweep the floor of your supermarket at $ 3.00 an hour, hire 2 people at $10.00 an hour and give them some type of machine.) This helps the 2 workers with jobs, the machine manufacturer and any machine repair and/or service people involved and hurts the 8 low-wage workers without jobs.
If a higher minimum wage was the boon it is sometimes made out to be, why not set it at $50 an hours and help everyone?
2 mikebdot Says:
April 24th, 2006 at 10:06 am
>> by freeing up capital for productive uses, capital that is yearning to be employed profitably, President Bush’s tax cuts have done far more for the working poor of America than any arbitrary minimum wage hike ever could…

What evidence have you of this? Remember, you say “working poor” here, which means people who are actually working. I’m assuming you mean 40 hours per week? You think a decrease in taxes of a few percent would benefit them as much as an increase in wages of 10-20%? Or are you arguing that more people are becoming employed because of the larger tax decreases seen that frees up capital and that more people can become “working poor”. I guess it could be argued that the benefit to the “working poor” would be that now there are more “working poor” so now they can make friends with each other.

Also, is there any evidence that suggests that raising minimum wage would put many of these “working poor” people out of work? Is your sole argument that some small companies couldn’t afford to pay them more than the fixed income they were already paying them? Perhaps they could decrease their hours and give them the same amount of money. Then, the hours that are freed up could be put in somewhere else? Also, if wages increase, would demand not increase for various goods/services? If this happens, supply must increase to facilitate, so companies begin making more goods/service or new companies appear and hire any workers that were displaced and could not find employment elsewhere.

I just don’t understand how you believe your statement to be a truism. Tax cuts need to be coupled with fiscal discipline, otherwise, we’re stealing from the future and these same “working poor” are going to be burdened by even tax raises (as will the rich) to pay off the interest of the money that is being borrowed.
3 Mark Says:
April 24th, 2006 at 10:24 am
mikbdot, unfortunately, it’s hard to find a ‘nonpartisan’ analysis of the Bush tax cuts and employment (even from supposed nonpartisan groups). The conservative Heritage foundation says this:

If Congress makes the tax cuts permanent, the major economic benefits begin in 2011. For example,

*Total employment will rise by 1,087,000 jobs per year, on average;
*Annual GDP will be over $111 billion higher, after inflation;
*Personal savings will grow by $163 billion per year, on average, after inflation; and
*After-tax household income will grow by an annual average of $274 billion per year, after inflation.

However, these benefits become economic losses if Congress fails to make the 2001 and 2003 tax cuts permanent. What is the cost of failing to act? Over one million lost jobs each year between 2011 and 2014; over a hundred billion dollars less in economic output per year; slower wage and salary growth; slower savings growth; and so on. The need for Congress to make the 2001 and 2003 tax cuts permanent is clear.

The left-leaning Economic Policy Institute paints a different picture: Changes in tax law since 2001 reduced federal government revenue by $870 billion through September 2005. Supporters of these tax cuts have touted them as great contributors to growth in jobs and pay. But, in reality, private-sector job growth since 2001 has been disappointing, and a closer look at the new jobs created shows that federal spending—not tax cuts—are responsible for the jobs created in the past five years.

So, truism? You’re right, it’s my own opinion, not a truism, regarding the Bush tax cuts. I think there is a basis for the larger point as a truism, though; economics is not a zero-sum game and a rising tide lifts all boats…
4 mikebdot Says:
April 24th, 2006 at 1:48 pm
Unfortunately, there is never a way to know exactly what the cuts did. You can make projections until you’re blue in the face, but unless we actually pass tax cuts, rescind them, pass them, rescind them a few times, the benefits will never be known (the case for causation cannot be made until a few repetitions are included in the sample - Or maybe this is just my engineering background taking over my thinking…)

Anyhow, tax cuts for the sake of tax cuts is just as worthless as minimum wage hikes for the sake of minimum wage hikes. Unless a case can be made that there are indeed programs worth cutting because they add no value to the country as a hole, then, cutting taxes is a just as much of a gimmick. But, no politician wants to be the one that decreases funding to Medicare or Social Security (or doesn’t increase the funding by the promised amounts).

When can we get some politicians that actually have the courage of their convictions, on either side of the aisle? Don’t run on “fair taxes”, run on “raising taxes to pay for the enormous deficit”. Don’t run on “lowering taxes”, but on “cutting the fat from the government”. The duplicity does nothing for the country.