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Increasing the Minimum Wage

March 19, 1987

Raising the federal minimum wage will end up hurting instead of helping those at the bottom of the wage scale. Thomas Carlyle characterized economics as "the dismal science," and it is indeed regrettable that economic analysis shows this humanitarian gesture will not work.

Many proponents of raising the minimum wage implicitly subscribe to a static view of the world, in which workers could get more and business less without anything else changing. The real world is bound to disappoint them. For when the cost of a resource rises a reaction will ensue.

First, a fall occurs in the amount of the resource demanded. When wages are forced up, companies find that some jobs are no longer worthwhile. This hits especially hard on the less skilled people at the bottom, whom the proposal is designed to help! Keeping a few extra sales clerks on at night or hiring an extra hand for the lunchtime rush becomes far less attractive when it costs several thousand dollars more per year.

Second, there is a substitution effect, a search for a less expensive way to accomplish the same goal. For example, when the price of butter rises people tend to use more margarine. In the same manner a rise in wages leads companies to substitute skilled for unskilled workers, to replace numbers of less-skilled workers with machines and a few highly trained workers, and to look for cheaper labor sources (i.e., overseas).

Labor unions (representing mainly skilled workers) understand this all too well. It's no surprise that organized labor lobbies hard for increasing the minimum wage, since an increase in the minimum wage will end up increasing the demand for their members. Of course they will want to choke off the foreign competition with a good stiff tariff.

Temporarily taking to heart the proponents' plea that workers "need" a higher wage in today's expensive world illustrates the folly of the results. Why not make the minimum wage something really liveable, say $25,000 a year for any job? Paperboy, fast-food counter order-taker, you name it. It's easy to see that these jobs would go the way of the elevator operator! No chance to work one's way through school, to learn a skill on the job, to get an entry-level position in the economy. This is too unpalatable, so the proponents only seek a moderate increase in the minimum wage bringing only some additional unemployment.

The proponents can pretend to themselves that no one will be hurt by raising the minimum wage, but it's simply not true. We don't live in their static world, but in a dynamic world that will adjust to the change and harm the very people they believe they will help. The poor don't need friends like that!


Canoga Park

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