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Minimal Wage, Most Harms

It is difficult to pinpoint the worst part of the President’s stimulus package moving through the new Congress. There is its gargantuan size—$1.9 trillion—far more than President Obama’s $900 billion stimulus for the financial crisis. And then there is the disproportion of its size to the magnitude of the crisis. Obama’s stimulus reflected about half the projected fall in output from the post-financial crisis recession while this one provides three times the projected output shortfall of the Covid recession. It’s as if the government is playing with Monopoly money—oblivious to the additional taxes or inflation that will be necessary to extinguish the additional debt. Excessive stimulus today means less liberty tomorrow.

And then there are the dubious objects of the government’s solicitude. While a small proportion of the money goes to the necessary delivery of Covid treatments and vaccines, much of the rest amounts to handouts to people, regardless of whether their income has been affected by the crisis, and bailouts to states, regardless of whether they have managed their finances wisely. The stimulus is largely a cover for redistribution—to citizens making under $75,000 a year and to the largely blue states who have mismanaged their finances. Like all redistribution, this part of the stimulus encourages consumption over investment, but this one also incentivizes state profligacy. The President is not letting a crisis go to waste. He is using it to creates more crises.

But the worst proposal currently in the package is that calling for a $15-an-hour national minimum wage. This doubling of the current federal minimum strikes at liberty and federalism. It harms the least able in society by depriving them of the dignity of work. It flies in the face of both economic theory and empirics. It is an offense against principle, equity, and knowledge. 

Liberty

Government should restrict action when individuals and businesses are interfering with the liberty of others by imposing costs on them. (Regulation of pollutants, for example, is therefore justified.) But what costs does it impose on society if a business provides someone a job at a mutually agreed upon wage? Presumably, the worker cannot find a job paying more than $15 an hour that he likes better, or he would already be working at it.

Some have argued that businesses may have monopsony power or are colluding to artificially hold down wages. If that is the case (and it is rarely so given the wide range of businesses that compete for unskilled labor), competition law can take aim at any collusion or monopsony that depresses wages.

The Biden approach to the $15 minimum perfectly captures the evils of centralized government—a one-size-fits-all approach that does not recognize the diversity of endowment and circumstance.

And if society believes that some people deserve a higher income than the value of their work provides, they can supplement wages through government support. The earned income tax credit does just that without distorting the price of labor. But a minimum wage law interferes with the discovery of the efficient wage that comes from voluntary bargaining between employers and employees.

Federalism

Even if a minimum wage were justified, it should be imposed at the state or local level, not by the federal government. The cost of living differs substantially in different parts of the country. The median wage also diverges among the states. In Montana and Mississippi, it is lower than $15 an hour, and the median in several other states hovers right around $15. By contrast, Connecticut has a median wage of over $30 an hour.

A recent study illustrates that the hike will have much more destabilizing effects in lower-cost and lower-wage areas of the nation. A high national minimum wage sabotages businesses in rural red states. That may be a feature, not a bug. The party imposing it on a party-line vote will never be elected there, and it is antagonistic to these states’ welfare.

Some defenders of the minimum wage hike, like The Economist‘s “Free Exchange” columnist, recognize that a minimum wage will crush jobs in these areas. Nevertheless, their argument in favor is that it will force many people to move from low-paid areas to places where they would become more productive. But some people may prefer to stay in a community with long-standing ties or other pleasures rather than be forced elsewhere to earn a higher wage. The columnist’s enthusiasm for central planning at the expense of individual choice demonstrates how far The Economist has traveled from the classical liberal magazine of Walter Bagehot to one often indistinguishable from the rest of the left-liberal media.

The Least Advantaged

The minimum wage will have the worst permanent effects on those with the lowest endowments. Some people are limited in cognitive ability. Others are disabled. The higher minimum wage will put many in these groups permanently out of a job because their value to a business is lower than $15 an hour. The minimum wage is a message of contempt for their dignity and, indeed, their happiness, as it is well known that long-term unemployment is deeply depressing. Welfare is no substitute for work to the many who want to contribute to their own support.

Young people too will lose the opportunity to gain skills and discipline because few businesses will want to put untested, unskilled workers on the payroll at this wage. The result will likely be more crime and less opportunity to move up the economic ladder, particularly from the communities where families provide neither the stable environment nor the authority figures that early participation in the workforce may offer.  

One of the striking features of the Biden plan is that it eliminates a lower minimum wage for the disabled and the young—a difference that would temper the baleful effects of a flat minimum wage of these groups. Thus, the proposed regulation fails to take into account not only differences in locality but also obvious differences among people. The Biden approach to the $15 minimum perfectly captures the evils of centralized government—a one-size-fits-all approach that does not recognize the diversity of endowment and circumstance.

Science

In her testimony to become Secretary of the Treasury, Janet Yellen stated that that the minimum wage hike would have a minimal effect on jobs. But that is not what the economic literature says, even for wage hikes far less radical than this one. Yellen herself said something different before she became a saleswoman for Biden. And the chief salesman for the Biden administration—Biden himself—claimed that “all economics” shows that the economy will grow because of the minimum wage. In fact, almost no economist believes it will boost output.

Science cannot dictate policy. But it is unacceptable as a matter of science or morality to deny this brutal fact, and it does no favors for those who will be left unemployed by this minimum wage hike. It is sad that a media that gleefully exposed any false claims of the former President is almost entirely silent when our current President proclaims a version of economics that is a politically driven fantasy.  

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