Barack Obama and the Teachable Wage

The U.S. President wants to up the national minimum wage to $9 per hour. How daring.

Such pushes to increase the legal minimum wage often succeed. There’s no mystery why. Most folks’ wages are not directly affected; we work for far more than that minimum. So it’s about other people. One consequence of this is that we don’t think very carefully about the logic of the regulation.

Which is why so many of us simply bow to social pressure, thinking that opposition to raising the minimum wage is “uncaring.”

That’s why it’s such a favorite issue among liberal Democrats, for they can play the “caring” card, their favorite in the deck.

And yet it is these Democrats who are obviously uncaring.

They could raise the minimum wage to $49 an hour, or more. It’s not Republican greed stopping them. I am sure that if Republicans did the smart thing and engaged in irony, demanding no minimum wage increase unless it was substantial, like, say, to $49 an hour — a substantial pay raise for all, not just a marginal increase for the few! — the Democrats would backpedal faster than Lance Armstrong, approaching a sunrise, on blood transfusions from Vlad the Impaler.

The truth is, the president’s paltry $1.75 increase is suspicious.

Why so little?

The reason is simple. Minimum wage laws hurt the poor the most. The poor don’t vote as much as seniors and college grads and union workers. And the one group here that often competes for low wages — college graduates — is helped by the minimum wage, for it cuts out least skilled workers from the job market.

How?

Minimum wage laws do not give out pay raises. That’s not what the law does.

A minimum wage law is a price floor. It prohibits transactions, in this case the hiring of somebody for wages or salary, below a certain amount. The current minimum wage is $7.25, and applies to most workers in most industries. (There are a few exceptions.) When legislators enact such laws, they are not giving people earning the minimum a wage hike. (They can do so only with their own employees, and, notoriously, legislatures often exempt themselves from their own employment rules.) They are prohibiting workers from working for wages lower, and prohibiting employers from hiring workers for less, than the minimum.

When a minimum wage rate is hiked, it’s up to the employers to decide whether (a) to raise the wages of those working below the rate, or (b) to let them go, or (c) to downsize their jobs (say, raising their hourly rate but employing them for fewer hours).

Folks don’t go into business to deplete their wealth. They go into it for profits. When the cost of doing business rises — as paying higher wages neatly accomplishes — they tend to economize, shifting productive factors around to reduce costs. So, they often invest in capital goods that make labor more productive, allowing them to shift down on units of labor — hiring fewer people. So, even if they don’t fire anyone right after a minimum wage hike, they may lay off hiring more people as time goes on, or downsize jobs over time.

The effect on employment is there, but not so as you’d notice.

Further, as they must pay for more low-end work, employers tend to substitute more qualified laborers for less-skilled ones. So the unemployed college grad is going to find it easier to get a job than a high-school dropout — much easier, since the deck has been rigged in his favor.

It’s not difficult, then, to see why politicians tend to prefer incremental increases in the minimum wage to huge leaps: The damage done is comparatively small, the people who are most hurt are less likely to realize who imposed the harm and also less apt to vote than those who are helped or not at all effected, and some of the effects are spread out over time to decrease the likelihood that voters would notice.

But hike the rate to above most market wages, and you’d see massive unemployment. Most folks would get hurt.

And even politicians would suffer.

By raising the minimum wage to $9 an hour, Barack Obama risks little. Most of his admirers will impute continuing high levels of African-American unemployment to other factors, seniors and union workers won’t be affected directly, and white high-school grads and college students may even be helped, if at the expense of others. So he’s covered several of his major Democratic constituencies.

Of course, it makes hash of the “Democrats care about the poor” mantra.

But that’s only if you are paying attention.

It might behoove Republicans to make Americans pay attention. Make the minimum wage a “teachable moment.” Up the ante. Demand (as I suggested above, and at Common Sense on Friday) that any minimum wage rate hike be significant, so that it could affect most folks’ wages.

And let the conversation begin. In earnest. And rationally. Not with knee jerks, bluster, and the usual political hucksterism.      [further reading]

January 17, 2013

This column first appeared on Townhall.com.