BUSINESS EXCHANGE: Why You Should Question Minimum Wage Bills

William Reed | 2/26/2014, 3 p.m.
Black Americans should be dubious of the latest public policy snake oil that Democratic politicians and union leaders are promoting.
William Reed

Black Americans should be dubious of the latest public policy snake oil that Democratic politicians and union leaders are promoting. Minimum wage laws sound good, but are an important public policy issue that should be scrutinized closely, not only for the damage they do to individuals and the economy, but as an illustration of the profound difference between liberal and conservative approaches to problem solving.

Given that the wage floor has far reaching effects on the economy, meaningful consideration of its impact on workers, consumer spending, income inequality and other issues is needed.

Saying “reversing the growing gap between rich and poor is the defining challenge of our time," President Barack Obama has called to raise the federal minimum wage and to automatically adjust it with inflation, a move, Obama says, “is aimed at increasing the earnings of millions of cooks, janitors, aides to the elderly and other low-wage workers.” The president’s plan hardly helps the gap between the nations’ rich and poor. Four million Americans earn wages at or below the federal minimum wage of $7.25 an hour, which yields an annual income of $15,080 that minimum wage proponents say “is below the federal poverty line for families of two or more.”

What Americans still need to grasp is that low-wage jobs are fast replacing middle-class ones. Sixty percent of the jobs lost in the last recession were middle income, while 59 percent of the new positions were in low-wage industries that continue to expand such as retail, food services, cleaning and health care support. By 2020, 48 percent of jobs will be in those service sectors.

These days, minimum wage laws are a popular and ingrained public policy. But in reality, such laws do significant and lasting damage. The “Liberal Story” is that something needs to be done for low-wage retail and restaurant and fast food workers who earn so little they must rely on public assistance to supplement their wages. Nowadays, bodies from Congress to city and county councils are passing legislation to raise minimum wages to $10, or more, per hour.

Most free-market economists oppose raising the minimum wage and call its rationale into question. If eliminating poverty is as easy as passing such legislation, why not go all the way and make the minimum hourly wage $20, or $30? It’s not your money you’re spending. Minimum wage laws do major damage to the economy. Minimum wage proponents call it a “living wage,” and argue that the minimum wage is the absolute least a person can survive on. But why settle for mere survival? Why not set it at $30 per hour which would give a family of four an annual income of $60,000?

The gross national product (GNP) is the market value of all the products and services produced in one year by labor and property supplied by the residents of a country. How realistic is the GNP derived from workers with inflated wage scales? From a “free-market” point of view, minimum wage legislation is but a ploy to make it appear as if the Democrats are protecting low-income workers. Politicians promise low-skilled workers a higher wage, but that promise cannot be kept if employers cannot profit from retaining those workers or hiring similar workers. Jobs could be lost, not created; and unemployment will rise as more workers search for jobs they can’t find at the above-market wage. The belief that increasing the minimum wage is socially beneficial is a delusion that is short sighted and ignores reality. The concept involving “minimum wage laws” is an easy and alluring fix for politicians, but is hardly the fix for what ails America.

Going forth, we must recognize that across the American economy, the private sector is based on voluntary exchange. No matter what politicians say, employers can’t be forced to hire and pay people. If a worker adds less value than the minimum wage, an employer would lose money by hiring him. Firms should only invest in human capital if they expect to receive a proper return on their investment.

William Reed is publisher of “Who’s Who in Black Corporate America” and available for projects via the BaileyGroup.org.