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What is the case for raising the minimum wage? Supporters say it will help the low-paid worker, the teenager or the young person in his 20s, just starting out. They claim that it helps the economy because it will generate more buying power. More people at the bottom of the economic scale have more money to spend, they say. And none of this, minimum-wage advocates argue, will have any adverse effect on businesses. On the contrary, they say it will actually help them, as more people have more money to spend.
But that’s not the way a small-business group, with thousands of members who actually have to meet payrolls, sees it.
“Everywhere minimum-wage laws have been debated our members have told us unambiguously that they strongly opposed arbitrary increases in the mandatory minimum wage,” says Jack Mozloom, a spokesman for the National Federation of Independent Businesses (NFIB). “They regard them as intrusive to their business and disruptive to the economy.”
The NFIB is a small-business organization with 350,000 members nationwide. The majority of its membership own a small business with five or fewer employees. NFIB members say previous minimum-wage increases have hurt them.
NFIB members know the effect of minimum-wage laws: They destroy job creation, making marginal jobs unprofitable. They hurt the small business with a few employees, struggling to survive. Every increase in the minimum induces a decline in real output and a decline in employment, warns Jude Wanniski in The Way the World Works.
Nevertheless, New York State Assembly Speaker Sheldon Silver said that “rigorous research by economists in 2010 has debunked the myth that raising the minimum wage has caused job loss.”
How can Silver and his colleagues in government, most of whom have never run a small business, be sure that increasing a key business cost will not hurt business? He and others say minimum-wage laws will be good for the small-business person.
He says that people of modest incomes will have more money to spend in their communities and they will spend it on the small businesses that are now complaining about costs and not making enough sales.
Still, in the second part of his statement, Silver had a caveat that tells us that he concedes the potential dangers of raising the minimum wage again. He said the state legislature’s goal was to “improve the standard of living without negatively affecting the economy.”
But if Silver and his allies are so sure that raising minimum wage will result in improved buying power without “negatively affecting the economy,” then why not triple or quadruple the minimum wage? Then, going by his flawed thinking, there will be a ton of increased buying power that will lead to a booming economy.
Wanniski explains why Silver and others don’t follow their minimum-wage-increase ideas to their logical conclusions: “If, say, no worker were permitted to work at less than $1,000 an hour, there would be no employment and no output in the money economy. Everyone would be forced to barter.”
In examining the fallacies of minimum-wage laws and increased government spending, one is reminded of Frédéric Bastiat’s witticism about military spending. If it is so good for the economy, then why not draft everyone into the army and wipe out unemployment?
Speaker Silver doesn’t need to hedge. There is already plenty of evidence that minimum-wage laws hurt the economy. They hurt the ability of businesses, especially small ones, to adjust costs, to hire, and, ultimately, to be profitable.
“I find that when minimum wages go up … it becomes cost-effective to find other ways to pay for work,” says Clarence Price, the owner of a Binghamton, New York, Roto-Rooter business with six employees.
“As an example, a few years ago, when the minimum wage went up, I had to stop using high-school students to clean up.” It became more cost-effective, he adds, to replace the marginal workers with equipment because “it doesn’t require Social Security. As a result,” Price adds, “two kids lost their jobs, which I feel bad about.”
But even when no one is directly hurt, the effect of minimum-wage laws, of higher costs imposed by political authorities, is felt for years. Higher costs can make a business less competitive.
In New Jersey, where a minimum-wage increase went into effect in 2006, it was “an enormous blow to us,” says Cris Mesanko of Flow House, a water-park amusement on Long Beach Island.
“That last minimum raise amounted to 40 percent over a 12-month period. It causes a business to lose its margin strength. And you can’t just raise prices to make up for that,” he said.
And that means what for his water-park business?
Mesanko says fewer hours, fewer jobs, and less capital investment, such as new rides or upgrading the park in other areas. All of that, he notes, makes the business less productive. Fewer jobs can be generated, owing to lower profits. That means fewer opportunities for young people starting out, people eager to work but with no experience.
And raising wages artificially by fiat instead of by market forces has another consequence: Consumers pay higher prices, which lead to fewer sales. The government, through its blundering interventions into the market, creates a vicious cycle that keeps unemployment rates high, especially among the youngest and least-experienced workers. So the government ends up accomplishing the opposite of its stated goal of reducing unemployment.
The government can’t decree or spend an economy into prosperity, otherwise the economy would now be booming and unemployment would be small. All wage-control schemes, part of the various inflationary ideas, are defective ways of boosting buying power. Indeed, if minimum-wage laws were so good, then, given the myriad minimum-wage schemes that have become law, shouldn’t youth unemployment be at very low rates?
Is there another way?
“Although most modern industrial societies have minimum wage laws, not all do,” writes Thomas Sowell in Basic Economics. “Switzerland and Hong Kong have been among the exceptions — and both have very low unemployment rates,” he writes.
So yes, mirabile dictu, there is an alternative. The government can stop pretending that it knows what the proper wage is for anyone, especially the least experienced of workers.
It can do no harm and let the economy naturally recover.
It can let employers do what the best of them do in hard times.
It can let businesses lower costs and produce more and better products, which will lead to greater levels of employment.
It can listen to Lord Melbourne, Queen Victoria’s first prime minister, and “leave things alone.”
It can abolish the minimum wage and all other price controls.
This article was originally published in the November 2012 edition of Future of Freedom.