The Opportunity-Killing Minimum Wage

Among non-economists and politicians, the minimum wage is one of the most misunderstood issues in economic policy. President Biden and almost all Democrats and some Republicans in the US Congress advocate increasing the federal minimum wage from its current level of $7.25 an hour to $15 an hour over four years. They argue that many of the workers earning between $7.25 and $15 will get a raise in hourly wage. That’s true. But what they don’t tell you, and what many of them probably don’t know, is that many workers in that wage range will suffer a huge drop in wages—from whatever they’re earning down to zero. Other low-wage workers will stay employed but will work fewer hours a week. Many low-wage workers will find that their non-wage benefits will fall and that employers will work them harder. Why all those effects? Because an increase in the minimum wage doesn’t magically make workers more productive. A minimum wage of $15 an hour will exceed the productivity of many low-wage workers.

This is from David R. Henderson, “The Opportunity-Killing Minimum Wage,” Defining Ideas, February 18, 2021.

Another excerpt:

Employers don’t hire workers as a favor. Instead, employers hire workers to make money. They hire people only if the wage and other components of compensation they pay are less than or equal to the value of the worker’s productivity. If an employer pays $10 an hour to someone whose productivity is $15 an hour, that situation won’t last long. A competing employer will offer, say $12 an hour to lure the worker away from his current job. And then another employer will compete by offering $13 an hour. Competition among employers, not government wage-setting, is what protects workers from exploitation.

We all understand that fact when we see discussions on ESPN about why one football player makes $20 million a year and another makes “only” $10 million a year. Everyone recognizes the twin facts of player productivity and competition among NFL teams. The same principles, but with much lower wages, apply to competition among employers for relatively low-skilled employees.

Also, see how I discuss the last 28 years of literature on the minimum wage.

And finally:

The University of Chicago’s Booth School has an Initiative on Global Markets (IGM) that occasionally surveys US economists on policy issues. Possibly because of the surveyors’ understanding that the $15 minimum wage would hurt some states more than others, the IGM recently made the following statement and asked forty-three economists to agree or disagree: “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.” Unfortunately, the question did not specify what is meant by “many.” Is it ten, twenty, thirty? Some economists surveyed pointed out that ambiguity. That ambiguity could explain why a number of the economists answered that they were uncertain. But of those who agreed or disagreed, nineteen agreed that it would cause job loss in many states and only six disagreed.

One economist who disagreed, Richard Thaler of the University of Chicago, gave as his explanation this sentence: “The literature suggests minimal effects on employment.” No, it doesn’t. As noted earlier, the federal government has never tried to raise the minimum wage by such a large amount and so there is no scholarly literature on such an increase. Would Thaler say that if putting a cat in the oven at a temperature of 72.5 degrees Fahrenheit doesn’t hurt the cat, then putting a cat in the oven at 150 degrees wouldn’t hurt the cat either?

Read the whole thing.

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Author: David Henderson

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