Watching the Democratic debate from last week, it is pretty clear that one of the "big ideas" of the party for 2016 will be raising the minimum wage. The Democrats obviously think that this will make good politics, proving once again that they are on the side of the little guy, unlike those plutocrats in the Republican Party. They will not be dissuaded by the mere fact that this is a bad idea, particularly for the people they are trying to help.
Although endorsed by all, let's pick on Hillary Clinton as its representative proponent. Simply because it is fun.
An enormous amount of ink has been spilled on this subject. I have no intention of going through the statistics from all the conflicting studies, or dragging my innocent readers through them. The Economist magazine, in recent opinion pieces entitled "A reckless wager -- A global movement to much higher minimum wages is dangerous" and "Destination unknown -- Large increases in the minimum wage could have severe long-term effects," does a passably balanced and complete job of summarizing these results. So, let's stick to these.
Here are the main points from The Economist:
• Small increases in the minimum wage appear to have had a negligible negative impact on employment, at least in the short term. However, the increases that are being mooted by the Democratic candidates, such as the increase to $15 per hour proposed by Bernard Sanders and Martin O'Malley or even Clinton's $12 per hour, are well beyond the level that would qualify as "small." An increase to $15 per hour, for example, would affect two-fifths of the workers in America.
• Not surprisingly, the long term negative impact is much more dramatic. Perhaps as much as 100 times greater, as one study found. Over time, companies respond to higher minimum wages by substituting machinery for workers. This should not come as a surprise to anyone who has seen a video of an Amazon automated warehouse or is watching the race between Uber, Google and Apple to produce cars that will not need drivers. (Or, for that matter, anyone who has used a self-checkout line at a grocery store or paid for gasoline with a credit card at the pump. But like driving herself, these are probably things Hilary Clinton hasn't done for years.) The Economist points out that, when there are already many concerns about machinery replacing humans, this is not the ideal time to be raising the cost of the two-legged competitors.
• The studies show that the negative employment impact of the minimum wage clusters in the young and those without advanced education. In other words, exactly the part of society that the minimum wage is supposed to help. This result justifies the longstanding characterization of the minimum wage by economist Milton Friedman as a form of discrimination against the young and the unskilled.
• Raising the minimum wage may cause, and allow, businesses to raise prices. If true, then the minimum wage is a subsidy paid for through a hidden sales tax. Sales taxes are notoriously regressive, which means that the minimum wage once again harms precisely the segment of the population it is intended to help.
• The minimum wage is intended to lift people out of poverty. For this goal, it is a blunt and often misguided instrument. A study by the Congressional Budge Office found that only one-fifth of the estimated net gain in earnings would go to households below the poverty line. This is largely because many of the people who would benefit are second earners in a household that is already doing pretty well.
• Finally, most economist agree that the government has far more effective tools for helping the working poor, including the Earned Income Tax Credit ("EITC"), which tops up earnings without destroying jobs. Although not perfect, the EITC can be easily improved, as has been proposed, for example, by Republican candidate Marco Rubio.
This is what the statistical analysis shows. But we all know the old saying about lies, damned lies and statistics. Common sense, however, is no more supportive of the case for raising the minimum wage. How probable is it that a material increase in the cost of labor has a negligible impact on the amount demanded? Where is the money going to come from to pay the additional wages, particularly when the industries which are most affected by the minimum wage are also some of the ones with the thinnest margins (such as retailers, restaurants, warehouses, etc)? And if the increases are self-funded through higher productivity and employee loyalty, as proponents sometimes claim, then how is it that employers haven't figured this out for themselves, particularly when the first ones to do so can benefit not only from higher productivity but also from better quality staff?
The argument that minimum wages have a negligible impact on employment is simply untenable, particularly in the longer term. Another response, however, is that these are bad jobs - "McJobs," as they are often derided - and we should be happy to see them go. This is also nonsense. Is it really better for the unskilled, and the young, to be at home catching up on day-time television than to be working in any job? A McJob at least gets someone into the discipline, pride and socialization of working. It gets them onto the first rung of the employment ladder. Clinton, and the others like her, want to saw off the first rung and then sit around wondering why all the short people are unemployed.
There is another corrosive aspect to this policy. Politicians in general, but the Democrats in particular, love rewarding their constituencies with invisible money. Do our people want free contraceptives? Let's give them a "contraceptive mandate." Do our people want free child care? Let's require paid parental leave. Do the working poor, at least the ones who retain their jobs, want higher incomes? Let's give them a higher minimum wage. Let's do all of these things because none of them hit the budget and therefore we can still claim to be fiscally prudent. Best of all, when these added burdens contribute to flat-lining wage growth , we can then point to this as another reason for further government intervention. From the standpoint of the Democratic Party, this constitutes a "virtuous circle."
Politicians of all stripes should not be allowed this cowardice. They should be forced to recognize and defend the explicit costs of their policies, and not to hide them in regulatory burdens imposed directly on employers and other parts of the private sector. If they want to increase the compensation of the working poor, then let them propose and defend increases in, for example, the EITC. But of course they don't want to do this. They prefer to keep the constituency bribery below the table.
For those who saw the debate, you might remember the way that this topic was introduced by Clinton. She was asked a question about inequality, to which she responded, offhandedly, "of course, increase the minimum wage" before she went on to list a number of other equally misguided policies. Like only a particularly dim-witted child could fail to appreciate the obvious intelligence and benevolence of the proposal. Well, actually Hillary, this is one child who remains unconvinced. I hope that I am not alone.