Watts: Hold that Minimum-Wage Hike

October 9, 2013

by Tyler Watts, Ph.D.

For the use of the membership only

Building on recent fast-food strikes, an Indiana University law professor, Fran Quigley, a leader of the “Raise the Wage Indiana” movement, made an appeal for higher minimum wages in the Indianapolis Star. His reasoning, though, runs counter to my work experience as a young man and that of many others he professes to help.

Quigley trots out the usual advocate research, plus celebrity endorsements and, finally, a plea for basic fairness, complete with hard-up stories that paint an image of minimum-wage earners struggling to feed their children. He dismisses any and all research to the contrary, suggesting that opponents of a minimum-wage increase are nothing but bought-and-paid-for shills of multinational corporations.

The problem for Mr. Quigley is that for each of his arguments an equal and opposite argument can be produced. For example, for each left-wing think tank or academic study “proving” that minimum wages have no effect on employment, a right-wing think tank or academic study “proving” otherwise can be shown. For every Nobel Prize-winning economist in Quigley’s corner, at least one with the opposite view is in the other corner. For every CEO advocating higher minimum wages, a hundred large- and small-business operators advocating free-market pricing of labor can be found.

Finally, when Quigley makes his ultimate argument that higher wages for the low-income workers are simply a matter of fairness, I can turn the tables and state that it is fundamentally unfair for government policy to stick entrepreneurs with higher costs, much of which must ultimately be borne by their products’ consumers — including minimum-wage earners.

Fortunately for most of us, the current federal minimum wage of $7.25 affects only a tiny segment of the U.S. labor market. The vast majority of workers are worth much more, which means they’re not in the market for minimum-wage jobs.

But for those workers whose labor is not (yet) worth this arbitrary minimum — typically teens and under-educated young adults — the minimum wage becomes a binding price floor. The basic effect predicted by Econ 101, with a price floor set significantly above the market-clearing price, is a surplus of the good or service. This shows up in labor markets as unemployment.

How does Quigley explain the fact that the teen unemployment rate is currently near 23 percent, and has consistently hovered at about three times the overall unemployment rate? He can’t, because there is no way around this economic reality: If you mandate higher and higher prices for a good or service, at some point people are going to buy less of it.

Yes, smaller changes have smaller effects, which can be hard to capture in the data, especially given that about 99 percent of U.S. workers earn above the minimum wage (hence the sometimes ambiguous research findings). But Quigley is talking about forcing a sudden 45 percent increase in the cost of the lowest-tier labor supply in the U.S. — far larger than the “modest” pay hikes that, according to Quigley’s favored academic studies, don’t cause discernible unemployment effects.

The upshot is that higher minimum wages, like all price controls, make liars out of otherwise honest, hard-working folks and throw sand in the gears of the price system. Forcing me to ask for far more pay than my skill, education and experience justify does not help me; rather, it can hurt my current and future job prospects by shutting me out of those entry-level jobs necessary for young workers to build valuable on-the-job experience.

Economics notwithstanding, advocates such as Quigley will keep trotting out anecdotes about struggling low-wage workers in an ongoing attempt to shame a minimum-wage hike out of politicians. Well, let me close with an anecdote of my own.

My first summer job paid me $1 an hour, far below the then-current $4.25 federal minimum. Then again, I was 10 years old, and not capable of much other than sweeping up and being a gofer on construction sites. But by age 18, I had eight years of experience, could perform all manner of construction tasks, and earned about $10 an hour.

My friends, who were just starting their working lives, struggled to find work at minimum wage. And by my late 20s, I had acquired enough skills to easily pick up my own jobs, earning from $20 to $30 per hour, allowing me to support a family of four while I was a full-time graduate student in one of the highest cost-of-living regions in the country.

So count me as one of the lucky few who was able to completely bypass the debilitating effects of Quigley’s minimum wage.

Tyler Watts, Ph.D., an adjunct scholar of the Indiana Policy Review Foundation, teaches economics at Ball State University.

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