The Liberty Papers

The Washington Post’s Stephen Pearlstein, writing about the proposed increase in the minimum wage argues that the proposed 38% increase in the minimum wage wouldn’t have the impact opponents claim it would:

To begin, both economic theory and history suggest that small business will, in time, pass on its increased costs to its consumers. Small businesses that pay low wages tend to compete with other small businesses that pay low wages, so they will all face the same cost pressures and respond in similar fashion. The worst that can be said is that a higher minimum wage will add, very modestly, to overall inflation.

There is also general agreement among economists that a higher minimum wage, at the levels we are talking about, will have a minimal impact on adult employment. Slightly higher prices might reduce, slightly, the demand for Wendy’s hamburgers, cheap hotel rooms and dog-walking services. But largely offsetting those effects will be the increased demand for goods and services by tens of millions of Americans who will finally be getting a raise. A higher minimum wage doesn’t lower economic activity so much as rearrange it slightly.

The problems with Pearlstein’s arguments are multifaceted. First of all even a “little” inflation and “minimal” impacts on adult employment will have their most severe impact on the very low wage earners that the increase is supposed to help. Second, the reality of the situation is that many small business owners don’t have the freedom to raise prices that Pearlstein seems to think that they do. Competition, from other small businesses and from bigger companies like Wal-Mart mean that a businessman who raises prices risks losing customers, which leads to lower revenue and, inevitability has an impact on those low-wage workers.

More importantly, as John Stossel points out in his column today, the world which Pearlstein and others like him argue about when they call for a higher minimum wage simply does not exist:

Only 2.5 percent of all hourly workers make $5.15 an hour (or less; some jobs are exempt from the law), says the Department of Labor. “Minimum wage workers tend to be young.”

Few of them stay at the minimum wage for long. As they acquire skills, their productivity rises and they command higher wages. According to a study done for the Bureau of Labor Statistics, “minimum wages have virtually no effect on the careers of most workers.”

A small percentage of people do get stuck in minimum-wage jobs for a longer time. Since wages tend to rise with productivity, these are people whose productivity does not improve. A higher minimum wage will cost some of them their jobs. How does that help them?

It doesn’t of course, but it makes Pearlstein and those like him feel good. And that, I think, is all they really want.

Related Post:

The Real Cost Of A Minimum Wage Increase