Coelho and McClure: The Minimum Wage

December 23, 2014

by Philip R.P. Coelho, Ph.D., and James E. McClure, Ph.D.

Suppose a doctor told a two-pack-a-day smoker not to worry about his tobacco addiction because smoking another half-pack per day would shorten his life expectancy by only six weeks. What would you think of that physician? The physician may have been telling the literal truth; the additional damage done to the health and life expectancy of smoking an additional 10 cigarettes per day on top of the 40 (two packs) already consumed is relatively small.

But this ignores well-documented evidence that consuming two packs per day reduces life expectancies by more than 10 years. Any doctor focusing solely on the additional (marginal) negative impact of smoking could be accused of incompetence and medical malpractice. Yet this is precisely what economists do whenever they assess the damage done by minimum-wage legislation. Their analysis focuses on the additional harm done by an increase in legislated wages; it completely ignores the impact that existing minimum wages impose upon society’s most vulnerable.

Economic analysis focuses almost exclusively upon what will happen to unemployment with an increase in the minimum wages; ignored is the harm that current levels create. Minimum wages deprive the mentally and physically disabled, the least skilled, least educated and most inexperienced workers a chance to compete with more able, skilled, educated and experienced workers for jobs by working for lower wages.

The “low” wages the disadvantaged are paid do not reflect the dollar value of the additional training, skills, education and experience they receive. Focusing solely on money wages obscures economic reality; the disadvantaged receive both money and additional human capital that only comes from being employed.

The evidence that the most disadvantaged of society are those most adversely affected by minimum-wage legislation is abundant; it is intuitive, empirical and anecdotal. On the intuitive level, about one in 700 babies are born with Down syndrome; most adults with it are unemployed, and most of those who are employed are in sheltered workshops where they acquire few job skills. The law does exempt disabled workers (which presumptively includes those with Down syndrome) to be employed at sub-minimum wages. However, the regulations are so labyrinthine, obscure and subject to continual reviews that they may result in substantial sanctions that profit-seeking firms will justifiably ignore the possibility of employing the disabled at less than minimum wages. Rhetorical question: When was the last time you saw someone with Down syndrome working at Starbucks?

Why do we mention Starbucks? Because its boss, Howard Schultz, has repeatedly declared that he favors increasing the federal minimum wage. Starbucks is also noted for awarding its employees scholarships to attend colleges and universities. The point we are making is that Schultz’s solicitude is directed not to the most disadvantaged and vulnerable of society but to the advantaged and able. Does anyone believe that two percent or more of the employees of Starbucks are comprised of those with Down syndrome, inner-city black high school dropouts, ex-convicts, recovering drug addicts, the homeless or the wheelchair bound? True solicitude for the disadvantaged does not erect barriers that hinder acquisition of the habits and skills that allow them to be functioning and productive members of society.

Instead we have welfare and disability payments that condemn the truly disadvantaged to a life of poverty, enforced idleness and parasitism. Granted that minimum-wage laws are not solely responsible for these pathologies, but they do contribute to unemployment rates among the disabled that are twice those of the non-disabled. The labor-force participation rate among the disabled is one-third of those who have no disability. The socially disadvantaged join the mentally and physically disabled among those most afflicted by minimum-wage laws.

The socially disadvantaged include inner-city black children who typically have inferior educations and living conditions that reduce their chances of acquiring human capital. They drop out of school because they do not see the schooling they are receiving as benefiting them. Realistically, they may be correct, but after they are no longer attending school they do foolish things (surprise) that only teenagers would do, engaging in risky behaviors that lead to unplanned parenthood or prison. The result is that well over 70 percent of black babies are born out of wedlock, with well over 40 percent of black males over the age of 18 being felons or ex-felons. In some Chicago neighborhoods, the percentage of males who have experience with the penal system rises above an astounding 70 percent.

The decks are stacked against these people; a lousy education leads them to drop out and get in trouble, then the baggage of their youth and minimum-wage laws prevent them from joining the mainstream of American society. Abolishing minimum-wage laws will not instantly cure these issues, but it is a necessary condition for any realistic solution that can address the disadvantages and pathologies that plague the inner-city black population.

Beyond depriving the most vulnerable in society, minimum-wage laws have the effect of reducing the flow of goods and services the American economy produces each year. This hurts everyone, (the able, disabled, black, non-black, etc.). This is a simple example that illustrates this point:

Suppose someone — let’s say a teacher, Molly — can make $20 an hour teaching for 10 hours per day. Out of that 10-hour day, every hour spent not teaching costs Molly $20. She has to rake the leaves in her yard during the work day (raking leaves at night is presumptively impossible); the yard has a total of 15 bushels of leaves and she can rake them in one hour. That costs Molly $20 in forgone earnings. Alternatively, she can hire a person with Down syndrome (Mike) to do it, and the task will take Mike three hours. Mike is more than happy to be employed at $5 an hour, so Molly hires Mike. Both Molly and Mike are better off: Mike earns $15 and Molly is $5 better off (she pays Mike $15 to rake the leaves rather than doing it herself at a cost of $20).

But if there is a minimum wage of $10 an hour, then Molly has to pay Mike $10 per hour, not $5. It no longer makes sense for Molly to hire Mike to rake her leaves; doing it herself costs $20 in lost income while hiring Mike to work (3 hours at $10 per hour) costs $30. The minimum wage makes both Molly and Mike worse off; they are prohibited from engaging in trade. This damages all of society because Molly has given up producing services worth $20 to produce an output worth $15; the people who would have employed Molly have to either find someone else slightly less desirable, slightly more costly, or do without. They, too, are worse off.

When we aggregate these small changes across all of society we get enormous sums. We have fewer specialized services, more inferior, less specialized work (do-it-yourself writ large), and a decrease in the well-being of the most disadvantaged of society.

Minimum wages do more than handicap the handicapped; they also disadvantage those who earn them. People who obtain jobs at minimum wages that are elevated above the wages that unfettered markets would set are, on average, substantially more skilled, socially adept and talented of all the prospective employees. The basic characteristics that many applicants for minimum wage jobs have in common are that they are unskilled young people. So the relatively able-skilled applicants are employed doing menial work that is undemanding. The difficulty is that young people are (relative to adults over the age of 25) less concerned with the future and more oriented to the present. Increasing wages for relatively unskilled work seduces them into work that does not enhance their skill sets, and it reduces incentives to acquire more skills and education. By the time they realize they are stuck in dead-end jobs, they have family responsibilities and are unable to pursue other endeavors that may have lower current incomes but promise substantially higher incomes in the future.

Minimum wages are extraordinarily damaging to the most disadvantaged of society — the physically and mentally handicapped, the poorly educated, the young and unskilled and those with checkered histories that make them questionable employees. The road to perdition is paved with both good intentions and ignorance. The economics profession has been willful in its ignorance by concentrating on the marginal consequences of increasing minimum wages rather than emphasizing the continuing harm that minimum wages create.

Starbucks’ Howard Schultz and other men of good will unthinkingly embrace the belief that higher living standards can be legislated by simply putting floors on wages. This does not create prosperity; it creates poverty and misery. Even worse, the damages it does are concentrated upon society’s most vulnerable. This is a sin.

Philip R.P. Coelho, Ph.D., and James E. McClure, Ph.D., adjunct scholars of the foundation, are professors of economics at Ball State University.

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