It's an election year, meaning some politicians will be more interested in good politics rather than good policy.
Reeling from woes created by the Affordable Care Act (Obamacare), many legislators are turning to an issue that polling data shows to be popular: Increasing the minimum wage.
This issue might be good politics, but it has negative consequences that harm real people.
Minimum wage laws make it illegal to be employed for less than a set amount mandated by government. The main arguments in favor of raising this wage floor rest primarily on two premises.The first is that politicians can do a better job of setting an appropriate level of compensation than employers and employees would on their own in a free market. The second is that wage controls benefit poor people.
The first premise operates under the assumption that wages, low or high, are set by employers. That is incorrect. Compensation is the result of a negotiation (implicit or explicit) between the employer and employee. Nobody is forced to work a job and nobody can be forced to offer one. Wages also are influenced by the labor market. That is, the supply and demand of particular skill sets.
The best way for a worker to increase his or her wage is to gain the knowledge, experience and skills that would make him or her more productive and more valuable to employers.
Consider the fact that the median starting annual salary of a petroleum engineer is nearly $100,000, while many fast food workers earn under $10 per hour. Is this because the oil and gas companies are simply more generous than McDonald's? If wages were just set by employers, why would anyone make more than the minimum?
Understanding this helps explain why the second premise, that minimum wage mandates help the poor, is also incorrect. As my colleague Michael LaFaive has pointed out, the only true minimum wage is zero. That is, if an employer believes a worker is worth $9 per hour, and the government mandates paying him $10 per hour, the business will likely lay that worker off. The quickest route to poverty is the absence of income — something that happens to more people when government wage mandates are passed.
It's revealing, then, when census data analyzed by professors Joseph Sabia from San Diego State University and Richard Burkhauser from Cornell University showed that less than 15 percent of workers earning under $10.10 per hour live in poor households. In fact, most lived in households that are relatively wealthy.
Low-skilled workers are the first to be laid off when the government mandates higher prices on businesses via a minimum wage. Earning $0 per hour is much worse than $5, $7 or $9 per hour.
Of equal significance, all workers have to start on some rung of the labor ladder. By gaining skills and experience, they can move up that ladder and eventually earn more.
But minimum wage laws raise the lowest rungs, making it harder for people to get their start and effectively trapping them in poverty. That's bad for everyone.