Obama Is Wrong on Minimum Wage

[The following originally appeared in The College Fix on February 17, 2013. It has been approved for re-posting.]

President Barack Obama’s call for the minimum wage to be increased to $9 an hour during the recent State of the Union address is a bad idea for many reasons, not the least of which are potential harmful effects to the economy, according to several professors and economists.

One such economist is Art Carden, economics professor at Samford University and a regular contributor at Forbes, who said in an interview with The College Fix that employees who produce at a $9-an-hour level would benefit from a minimum wage increase, however workers who are not worth that wage would suffer as their jobs disappear.

Basically, Carden said that increasing the minimum wage would “reduce the quantity of labor demanded, create at least some unemployment, and privilege the more-productive at the expense of the less-productive.”

He’s one of many smart people to think as much.

Writing in The Free Market, economist Murray Rothbard once declared, “In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour…Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.”

But Obama touted lofty notions and feel-good sentiments during his address to make the case for a minimum wage increase.

“We know our economy’s stronger when we reward an honest day’s work with honest wages. Tonight, let’s declare that, in the wealthiest nation on Earth, no one who works full time should have to live in poverty—and raise the federal minimum wage to $9 an hour,” Obama said last Tuesday. “For businesses across the country, it would mean customers with more money in their pockets.”

Not necessarily, some professors warn.

Antony Davies, an economics professor at Duquesne University, said in an interview with The College Fix that when businesses—especially small businesses—are faced with increased labor costs due to minimum wage hikes, less valuable jobs are eliminated. After that, the extra workload is doled out to remaining employees, he said.

“Either the work becomes part of other employees’ responsibilities or the work gets foisted onto the consumer,” he said, adding small businesses have the worst go of it.

“Because small businesses tend to have fewer employees, it is harder for them to pass the work load from eliminated jobs on to other workers,” he said. “They will tend to feel the pain more than larger businesses.”

Davies offered this anecdote to help illustrate his point: “Once upon a time, when you pulled up to a gas station, someone pumped you gas for you. It turns out that that service isn’t worth $7.25 an hour to consumers, so gas stations stopped hiring workers to perform this task and instead let customers do it for themselves.”

Davies’ assessment echoes a recent LearnLiberty video, in which Professor Steven Horwitz of St. Lawrence University describes how small businesses can be harmed by minimum wage increases: “A few years ago, Wal-Mart came out in favor of raising the minimum wage. Why would they do that? Well, one reason is Wal-Mart pays above the minimum wage, while a lot of their competition pays right at the minimum wage. If government raises the minimum wage, those competitors face higher costs and Wal-Mart benefits as a result.”

In effect, having fewer competitors creates more favorable conditions for giant corporations.

Another unintended and unfortunate consequence of the minimum wage law is its negative effect on minorities, especially African-Americans.

A 2011 Economic Policies Institute Study by William Even and David Macpherson found that wage mandates created a considerable disparity in economic well-being between blacks and whites.

Studying 16-to-24 year-old males lacking a high school diploma, the study showed that, for each 10 percent increase in a federal or state minimum wage, employment decreased by 2.5 percent. For black males sans a diploma, however, employment decreased by 6.5 percent—more than twice as much.

Additionally, the study found that the consequences of the minimum wage on black young adults “were more harmful than the consequences of the recession.”

Underscoring this, the argument businesses are trying to stiff their employees with the least amount of pay possible doesn’t hold water, educators told The College Fix.

“This isn’t true and it’s easily demonstrated,” Davies said. “If it were true, then all jobs would pay exactly the minimum wage. Why do employers voluntarily pay more than the minimum wage?”

Competitive markets, when allowed to function without interference, are the true source of higher pay, professors argued.

“Wages are determined by workers’ opportunities and their productivity; markets are pretty competitive,” Carden said, adding employers must pay a worker as much as he/she is worth, “because if they don’t, someone else will.”

When asked whether or not there should be any minimum wage at all, both Carden and Davies bluntly said: “No.”

Yet, despite mountains of historical and empirical evidence to the contrary, most people view the minimum wage law as an unquestionably positive force.

Why is this so?

Henry Hazlitt may have put it best way back in 1946 in his Economics in One Lesson: “Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices, people who would be among the first to point out that minimum price laws might be most harmful to the very industries they were designed to help, will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.”

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