In Tuesday’s State of the Union Address, President Obama proposed raising the federally mandated minimum wage to $9 per hour, a 24% increase over the current mandate. In a subsequent conversation, my friend David Guenther of the Texas Public Policy Foundation made a good point about the effects of this if it were to come to pass:
Regarding the President’s $9 minimum wage proposal, what he doesn’t get (and seems intellectually incapable of understanding) is that if you have a robust economy that is creating lots of jobs, a minimum wage is irrelevant. When Austin’s unemployment rate has been < 4%, employers offering minimum wage can’t find workers. Who gets paid minimum wage in the Permian Basin? In Eagle Ford? In North Dakota? Case in point: when our unemployment rate was below 4% [in Texas] before the dot-com bust, there was a barbecue joint by my old apartment that had to advertise for $10/hour plus health insurance to find cashiers. As I recall, the minimum wage at the time was $5.25.
This is a point often ignored by those who advance the theory of social justice. As a devoted demand-sider, Obama is incapable of viewing the world from the perspective of an employer. He simply assumes that businesses can absorb the higher labor costs because they make profits. This myopic view assumes a static business model, instead of a dynamic competitive model in which businesses are constantly changing, growing, contracting and competing with each other. It also follows from Nancy Pelosi’s famous quote, “The best jobs plan is a welfare check.” This is the belief that if we simply unlock the money (i.e. redistribute) from the greedy profit hoarders, the economy will take off when all that money goes into circulation.
Of course, this is not how the real world works. Artificial creation of new expenses for businesses, whether they be in the form of Obamacare mandates, minimum wage hikes or higher taxes, will cause business expansion to slow. This means that fewer jobs will be available – the net effect being the opposite of the intended benefit. This will lead to LESS money in circulation and MORE hoarding of capital.
The minimum wage is also anti-competitive from another angle. The minimum wage doesn’t allow workers to compete for jobs in lean times. If I were in dire straits and needed ANY job to feed my family, I might be willing to make sacrifices in my living expenses and take a lower wage job, or to offer my services to an employer for less than the next guy. The minimum wage is just as anti-competitive and socialistic as wage caps.
Back to David Guenther’s point, that in a strong economy the minimum wage would be moot. Even in a bad economy, the data show that the minimum wage is largely irrelevant. According to Mark J. Perry of the American Enterprise Institute,
The notion that there are millions of full-time workers struggling to raise a family, but are stuck in jobs paying the minimum wage for long periods of time is more myth than fact. Almost all full-time workers (99.4%) are earning more than the minimum wage, and almost all full-time hourly workers (98.3%) are earning more than the minimum wage. Most importantly, the fact that more than three out of four teenagers (77.2%), who are the least skilled and least educated group of workers, earned more than the minimum wage in 2011 would suggest the minimum wage is mostly an entry-level wage for beginning workers with no skills. The reality of the labor market is that even a large majority of previously unskilled teenage workers are earning more than the minimum wage as soon as they acquire minimal jobs skills and work habits, and can demonstrate their value to employers.
Note that the data cited were from 2011 – the depths of the Obama recession, when unemployment averaged over 8%.
The bottom line is that Obama’s proposal is yet another solution in search of a problem, much like most of his policies. That is, of course, unless your goal is to fundamentally transform America.