Combine bipartisan "compassion" with bipartisan "bad economics" and the result is well-intentioned public policy which produces undesired results. Such is the case with minimum wage legislation--as passed last year in Washington and as it is being contemplated right now in the Michigan legislature.
Congress in 1989 mandated that the hourly minimum rise from $3.35 per hour to $3.80 on April 1, 1990 and then to $4.25 per hour one year later. Congress also has scheduled a two-step increase to 50 percent in the federal tip credit, the amount the minimum wage can be cut by employers whose workers earn tips.
In Lansing, the main focus of the debate is on whether Michigan law should conform to the new federal hike in the minimum or boost the legal minimum here even more. Legislators also differ among themselves about how to handle the tip credit and what to do about a training wage for teens, but too many members of both parties have bought the dubious notion that government "helps" the economy when it prescribes (and periodically raises) the minimum wage.
Some will say that pointing out the conceptual flaws in the minimum wage now is like closing the barn door after the horses have gone. But it's never too late to highlight principles of sound economics. This issue, almost perennial, will emerge again and again no matter what is decided in Lansing now.
It remains an inescapable fact of economic life that no legislature can make a person worth a certain amount by simply making it illegal for employers to pay him any less. Furthermore, the demand for labor depends in large part on the cost of labor: raise the cost and you cut the demand.
Legislators ought to ask themselves this question: Is it conceivable that someone out there in the labor market, because of age, handicap or lack of experience, may not be worth as much as $4.25 per hour? Or this question: Is there no job, no task that could be done, no need which could be fulfilled, that's worth, say, only $3.35 per hour?
If the answer to either question is yes (and it ought to be obvious that's the correct response to both), then what will happen to those people whose productive output is worth less than the minimum decreed by Lansing or Washington? Some might think those workers will simply get a raise, but real-world economics says they'll be out of their jobs.
Legislators implicitly acknowledge the point by expressing the desire to be "reasonable" in raising the minimum. If edicts from the legislature can relieve poverty and the minimum wage idea really makes sense, then why not decree the minimum to be $7 or $10 per hour? Why not be really generous and tell everyone that if they can't find someone willing to pay them $15 per hour, they are not allowed to work?
Minimum wage-fixing must inevitably price some people out of the labor market and ironically, they tend to be among the very people the law is supposed to help. Youth and minority unemployment is sky-high nationwide at least in some part because our humanitarian legislators are making it a criminal offense to be employed at their true market value.
Denying so many young people low-paying but entry-level jobs prevents them from starting up the economic ladder. Instead of picking up experience, learning a trade and gathering references and good work habits, they're out in the streets or on drugs--victims of somebody else's good intentions and lousy economics.
One big-city mayor who opposes hiking the minimum put it well when he said, "I'd rather be criticized for supporting a wage of $2.50 and save the $15,000 it costs to keep someone incarcerated. Those (in government) who oppose that all have jobs. None of them are out beating the pavement trying to find work."
That's why groups as varied as the National Association of Black Mayors, the Cuban-American Association and The Heritage Foundation support a lower minimum, at least for young people. The New York Times two years ago even editorialized that the "right" minimum wage for the economy was "$0.00." Fixing it anywhere by law, the editors concluded, has proven to be politically popular but economically unsound.
Henry David Thoreau once said, "If I knew for certain that a man was coming to my home to do me good, I'd run for my life." The minimum wage sounds like just what he had in mind.