Princeton economist Alan Blinder says raising the minimum wage would help low-skilled workers. Economic theory shows the exact opposite.
By: Walter Block
According to Princeton University economics professor Alan S. Blinder, writing in the Wall Street Journal, Kamala Harris is entirely correct in her intention to raise the federal minimum wage from its present “paltry” level of $7.25 per hour. In his view, an hourly $12 would be far more like it. His main argument is the “humanitarian case,” that the existing level “is insufficient to support ‘a decent quality of life.’” Mr. Blinder regrets that the tax transfer system will not adequately address “income inequality” and relies upon this legislative enactment of “predistribution, that is reducing market inequalities rather than trying to equalize incomes at a later date.”
There is more wrong here than you can shake the proverbial stick at. He offers no argument that income inequality is too high, nor that it would be justified to forcibly take money from the rich to give to the poor to ameliorate this situation. Moreover, his championing of the minimum wage law would increase wealth disparity, not reduce it. How so? In order to see this, we must ask a more basic question: What determines wage levels in the first place? And the answer is discounted marginal revenue product, or productivity, for short.
Suppose my productivity is $5 per hour. That means that for every 60 minutes I am on your shop floor, your revenue increases by precisely that amount. You would not pay me more than that amount, because if you did, you would lose money on the deal. If my wage were $6 per hour, you would be out of pocket for $1 each such time period. But my wage, at least in equilibrium, cannot be any less than that amount either. For example, if you pay me only $3, you earn a pure profit of $2, and other competing employers will bid my wage up to that amount, again, in equilibrium. There is no guarantee that I will always and ever earn that exact amount, but powerful profit and loss market forces will continually work to push me in that direction.
Why, then, do rock stars, top professional athletes, leading lawyers, and engineers earn skyrocketing salaries? It is because their productivity is so high, not because of employer generosity. Why is it that middling professors, journalists, accountants, nerds, and managers take home middle-class compensation, roughly in the low six figures? This is due to the fact that their contribution to the economy is significant, but more modest. What of the people who push brooms or ask if you “want fries with that”? Their pay is even less because the amount of cash they earn for their employers is lower.
Let’s get back to me. With no minimum wage law, under free enterprise, my $5 productivity would allow me to bank roughly that amount for every hour of my work. Also, I will get on-the-job training, which, hopefully, will increase both my productivity and hence how much I can earn in the future. What is my fate in the presence of a minimum wage law that sets the minimum above $5 per hour? Zero. Nada. Zip. Nischt. Nothing. Ningun. I will be consigned to a life of unemployment. No one will hire me! If they do, bankruptcy will beckon, since they are losing money on me, and if they do this once too often, that will indeed be their fate. I will be dead in the water, employment-wise.
This will not reduce income inequality. It will increase it. With no minimum wage, my hourly pay was $5. With it, I earn nothing at all.
If the minimum wage is so great, if it actually boosts salaries, why limit it to $12 per hour? Why not $12,000, or $12 million? Then we would all be rich beyond the dreams of avarice. Why not dispense with all foreign aid to poor countries, and, instead, just tell them to institute this praiseworthy law?
The minimum wage law is not a floor under wages, which boosts them, the higher it is. Rather, it is a hurdle, and the loftier it is, the more difficult it is to jump over it into employment. It attacks the weakest economic actors in our society. Before the enactment of this law, the unemployment rate of blacks and whites, youngsters and middle-agers, was about the same. Afterward, the joblessness rate rose to double for blacks over whites, yet again double for adolescents vis-à-vis adults, and quadruple (this is not a misprint) for black male teens compared to mature white men. This is a total and unmitigated disaster.
Right now, all those with productivities between the present $7.25 and the Blinder recommendation of $12 are safe from the ravages of this law. But if it is implemented, all of those people, bar none, at least not in equilibrium, will be consigned to unemployment. This is humanitarian? (I abstract from the fact that many state wage minima are higher.)
Blinder makes much of monopsony, and the Card-Krueger finding that a slight increase in the level of this law showed no subsequent unemployment. But they didn’t give enough time for this effect to be registered, and, worse, their empirical evidence was flawed. In any case, monopsony, if it exists at all, applies to single hirers of labor in this case (oligopsony to a small number of employers). But this is a phenomenon faced only by the very highly skilled. Top athletes can only work for one or a very few firms (NBA, NFL, MLB, NHL). Ditto for computer and other such scientists with very, very narrow specializations. At one time, the only option for nerds was IBM. Monopsony simply does not apply to workers who earn anywhere near minimum wage levels. They can work for an indefinitely large number of employers.
Fuhgeddabout an increase in the level of this malicious and wicked law. The entire system ought to be repealed, and salt sowed where once it stood. Blinder should have known better. He ought to have his Ph.D. degree recalled.
If Becker, Friedman, and Sowell were on his dissertation committee, his Ph.D. degree would never have been granted. Here is what these three towering pillars of economics had to say about this despicable law:
Becker: “It’s simple: Hike the minimum wage, and you put people out of work.”
Friedman: “A minimum-wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills.”
Sowell (in a 1995 Forbes article): “Repealing the Law of Gravity.”
Walter Edward Block is an American economist and anarcho-capitalist theorist who holds the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the J. A. Butt School of Business at Loyola University New Orleans. He is a member of the FEE Faculty Network.
Reproduced with permission from FEE.ORG.
