April 28 2014
Americans of all political stripes would like to see wage growth, especially among the lowest wage-earners. The difference of opinion, of course, is how to make that happen.
Liberals in Congress are pushing for an increase in the federally-mandated minimum wage. But increasing the minimum wage is not the solution to slow wage growth. In fact, wage regulations ultimately harm workers by reducing the number of jobs available. A better solution to our nation’s wage woes is economic growth.
Public polling suggests the majority of Americans support a minimum wage increase. That’s understandable, given our nation’s frustratingly slow “recovery” from the recession of 2007-2009, and the desire to reduce poverty.
While support for minimum wage might come from a good intention, it is misguided. If it seems too easy to reduce poverty simply by promulgating wage regulations, it probably is. Like Newton’s Third Law of Motion, actions in economic policy have reactions as well. Raising the cost of labor does not come without a tradeoff.
Raising the minimum wage will reduce the number of minimum wage (low-skill) jobs available. Basic arithmetic tells us this. If a company can afford to employ 3 workers at $7.00 per hour, the same company will be able to employ only 2 workers (technically 2.1 workers) at $10.00 per hour without increasing labor costs.
Liberal economists have attempted to blur the effect of minimum wage on employment, and sometimes minimum wage studies are flawed or inconclusive. But a comprehensive survey of minimum wage studies shows that among papers with “the most credible evidence, almost all point to negative employment effects.”
A recent projection from the Congressional Budget Office (CBO) confirms this. The CBO projected that the proposed minimum wage increase up to $10.10 per hour would “reduce total employment by about 500,000 workers.”
Limiting the number of minimum-wage (that is, entry-level) jobs available is not helpful to low-skilled workers who could be priced out of the labor market with a higher price floor.
As Rachel Currie highlights in this policy brief, a minimum wage increase may not even target the working poor that we all intend to help. Economists Joseph Sabia and Richard Burkhauser found that 63 percent of workers who would experience a raise due to a minimum wage increase came from households were they were second or third earners contributing to household incomes more than double the federal poverty line.
If we can’t help the working poor through a federal mandate, then what is a better solution to slow wage growth?
The real reason wage growth has stagnated is that today’s labor market is simply an employer’s market. Where there is slow GDP growth and high unemployment, there is slow wage growth. More workers are seeking jobs than there are job openings. This means employers don’t have to compete for workers as fiercely as workers are competing for jobs, and this robs workers of their bargaining power for wages.
That’s why conservatives suggest that the real solution to slow wage growth is job creation. If the economy created more jobs, then employers would have greater demand for workers. With higher demand, prices increase. In other words, if workers had more job opportunities, employers would have to value (pay) workers more to attract and keep them.
How do we make job creation happen? A job is created when a firm recognizes that adding another worker would allow for greater profit. For example, a store might decide to hire another shift of workers to stay open longer because longer store hours allow for more sales, and the revenues from these sales are more than enough to pay for the additional labor (and other costs, like electricity to keep the lights on).
To facilitate this process, our public policies should focus on making job creation easier for firms. This means reducing tax and regulatory burdens, providing easier access to capital, and encouraging investment.
While this growth-focused approach may be less obvious to most Americans than a simple change in wage laws, it is the only approach that will result in real, sustained wage growth to the benefit of all workers, and especially those who are currently struggling. No one wants minimum wage workers to live in poverty or to face stagnant economic opportunities, but raising the mandated wage is not the solution.