Politics, Not Economics, Driving Minimum Wage

On April 30, the Senate voted 54-42 to end debate on the Minimum Wage Fairness Act and effectively shelved it for the foreseeable future. The act would have raised the minimum wage of federal workers to $10.10 by 2016 and indexed it to inflation thereafter. Championed by Democrats and opposed by Republicans, minimum wage will be a flash point in the November elections. But does minimum wage genuinely help the workers that Democrats claim it benefits: the young, the poor, immigrants and women?

An answer is difficult to find in statistics. Both sides have masses of data from which to sculpt a politically expedient argument. Those arguments are driven more by emotions than stats. Democrats call Republicans heartless for dismissing vulnerable workers for whom the federal minimum wage has not increased from $7.25 since 2009. Republicans accuse Democrats of brutalizing the business environment at a time of painful unemployment.

President Obama expressed the tone of the debate in a White House event held on the same day as the Senate vote. Surrounded by low-wage workers, he stated, “We saw this morning a majority of senators saying ‘yes,’ but almost every Republican saying no to giving America a raise. ... [I]f they keep putting politics ahead of working Americans, you’ll put them out of office.”

It is useful to move past dueling statistics and rhetoric to consider economic principles. One basic economic principle: The market price of labor is set by the law of supply and demand which no politician can repeal. The law explains that a raise in the price of a good will result in a decline of the quantity demanded. Supply and demand impacts low-wage laborers in a particularly damaging manner for at least four reasons.

First, low-wage workers who perform relatively unskilled labor are more vulnerable to being replaced by automated systems. Panera Bread has already announced it will replace its cashiers with robots by 2016. Interestingly, Panera’s CEO Ron Shaich supports raising the minimum wage which is likely to increase the prices of competitors who use human labor or are “late” in automating.

Second, to hold down costs, businesses will eliminate marginal employees. If they do not or cannot, then the price of goods will be passed along to customers. Among the customers least able to absorb the hike in prices are low-wage workers.

Third, an increased minimum wage also shrinks the job market. An employer who pays $7 an hour may not be able to afford $10.

Fourth, competition for low-wage jobs increases although high-paid jobs are unaffected. Young and inexperienced employees may accept $7 as a way to enter the workplace and gain experience. But if wages rise to $10, then the job seeker competes not only with everyone willing to accept $7, but also with those who will accept $10. Especially with high unemployment, employers become more selective and less likely to hire the inexperienced or those with disadvantages such as poor language skills.

The economist Milton Friedman called the minimum wage “the most anti-black law on the books” because it raised the unemployment rate for blacks, especially black youth. The same dynamic creates unemployment for immigrants, the poor and other categories that the Minimum Wage Fairness Act is said to champion.

But debate over the act will be about election politics and not about sound economics. The political maneuvering was clear in the Senate vote. In advance of the vote, Sen. Tom Harkin (D-Iowa) threw down a gauntlet by declaring, “Who’s going to vote to give these people a fair shot at the American dream? And who’s going to vote against it?”

The only participating Republican to vote against ending debate on the act was Sen. Bob Corker of Tennessee. The only Democrat to vote with the Republicans was Senate Majority Leader Harry Reid of Nevada; this strategic move allows Reid to revisit a vote on the act in the future.

No compromise is likely. On February 12, Obama signed an executive order that required federal contractors to offer a $10.10 minimum wage to workers as of Jan. 1, 2015. It would be awkward for Democrats to offer a lower wage to other federal workers. Besides which, Democrats have little reason to compromise. Gallup and other polls indicate seven out of 10 people support increasing the minimum wage. It could be a winning issue for Democrats who are scrambling to hold on to a teetering dominance in the Senate.