Economic Ignorance and the Minimum Wage

An interesting fact of economics is that ignorance about it cuts across partisan and ideological lines.

Take efforts to raise the minimum wage from the current level of $7.25 to $9.00 an hour: unsurprisingly, Democrats overwhelmingly (87%) back it. Independents (68%) and GOP voters (50-47%) approve. Unexpectedly, one third of Tea Party supporters, self-proclaimed backers of economic sanity and public fiscal responsibility, want a hike in the minimum wage, too.

 Economics by fiat obviously has a great deal of appeal. Who can be opposed to people making more money? What a simple solution –just pass a law.

 Of course it’s too good to be true. If economic fiats worked, why stop at $9.00? Why not $50.00 or whatever?

 But people, even those on the left, intuitively understand that wouldn’t work. That’s why most politicians favoring an increase focus on a hike to the ten dollar range instead of, for instance, $15.00 (as chosen by the very liberal Washington D.C. City Council). Their thinking is that a “modest” rise of about 25% would be OK while doubling would be too much.

 The economic reality, however, is effected by any fiat, no matter how minor the raise is supposed to be.

Businesses are operated – and should be – with the profit motive as the primary impetus. As Adam Smith persuasively argued two and a half centuries ago, a pursuit of one’s self-interest in the economic sphere is the engine of success for the businessman and his customers.

 Increasing business labor costs have consequences. The more competitive the business environment, the narrower is the profit margin and the greater the impact of a minimum wage hike. The businessman can increase the price of his product (which may not be feasible in a particular marketplace due to the pricing of competitors) or he can reduce the number of employees and/or substitute machines for workers. (Do you not think there’s a labor saving motivation for the substitution of ATMs for bank tellers? Or grocery store self-checkout aisles for cashiers?)

Considered from this perspective, any minimum wage set by the government can have consequences that are actually harmful – certainly not helpful – to those on the bottom rung of the economic ladder.

[It’s worth noting that the minimum wage question affects only about 5% of the workforce, but as its wide support suggests, it has broad appeal beyond that number.]