Jeb Bush, who is trying to brand himself as the sane alternative to the Republican Presidential field, just backed the repeal of the Federal minimum wage. So, that’s that.
Meanwhile, there is still time for Republicans to prepare a credible challenge in the 2020 Election. As we search for ways to restore some basic rationality to GOP politics, perhaps the minimum wage is a good starting point. The insights required to gain even a distant understanding of minimum wage economics would break apart dozens of damaging misconceptions about poverty, race, and social mobility in America.
First things first – Why do we need a minimum wage? Won’t a free market set wages at the correct rate?
A minimum wage is necessary to create a free market for labor. There is no free market if one side can coerce the other, or if one side has such disproportionate power that they can collude to manipulate prices. In a labor negotiation, particularly for low-end labor, one side has access to capital, political influence, and relative wealth. The other has a hungry family and a ticking clock. Remove the minimum wage and other protections and potential employers earn the ability to coerce potential employees, robbing them of value. That’s not a free market.
Over the long term, everyone including the employers ends up poorer, but no one can stop that downward pressure on overall wealth. This is just one of many examples of how an absence of regulation eventually destroys capitalism. A minimum wage allows us to bring some real market forces to the labor market with very little bureaucratic overhead. The minimum wage is one of the lynchpins of capitalism.
But doesn’t a minimum wage destroy jobs?
A minimum wage destroys jobs in exactly the same way that capitalism destroys jobs. In a series of escalating cycles, a minimum wage eliminates low-value activities replacing them with more sophisticated, higher-value activities, just like capitalism does. Overall, this creates declining demand for human labor which benefits everyone. Whatever jobs are rendered unnecessary as a result of a free market for labor probably didn’t need to exist in the first place.
To see this in action, take a look at child-labor laws. Opponents of child labor laws were concerned that Federal legislation would eliminate hundreds of thousands of jobs. They were right and it was good for everyone.
Elimination of child labor sped the adoption of new manufacturing and mining technologies. This created new, better paying jobs higher up the value stack making it possible for fewer employees working shorter hours to earn vastly more money, thereby supporting more people. More children could attend school and develop new skills rather than descending into the mines as soon as they could walk. Better living standards for more people enriched the entire economy and culture.
If you claim to love capitalism and markets then you shouldn’t be concerned about the jobs destroyed when workers gain more power to negotiate. That’s capitalism at its best.
Won’t markets force innovation even without a wage floor?
No, not always. Innovation requires capital to be invested and investment involves risk. Most of those new ventures fail. To the extent possible, capital owners will seek to extract rents from their capital rather than risking it by investing in technology. As long as they can continue extracting new revenue by pressing down wages instead of taking on risk, innovation will stall. Setting rules that limit the ability to squeeze rents from capital can press capital into new investment and create massive new economic growth.
Doesn’t a minimum wage limit opportunity for the poor and minorities?
Yes, a minimum wage limits the opportunity of poor and minority workers – to be coerced into work that will get them nowhere while dragging down the wider economy. This is a particularly ugly, condescending argument that deserves to die. Everyone who deploys it is making an ass of themselves.
Again, let’s refer back to child labor laws because exactly the same argument was deployed there with exactly the same realities sitting behind it. Child labor laws completely destroyed the ability of ten year old kids to earn money for their families by dropping out of school and working twelve hours days in dangerous conditions. That’s what it was designed to do and that’s what a minimum wage does.
The argument against the minimum wage assumes that this is a bad thing. It is not a bug, it’s a feature. Leaving the fourth grade to work in a sweatshop was an “opportunity.” Quitting school to feed your family with a WalMart job is a very similar kind of “opportunity.” Like child labor laws, a minimum wage is supposed to eliminate jobs that accomplish nothing for workers or the economy while encouraging the development of new, more valuable economic activities. What would this mean for the poor? Good things.
As usual, research backs up what experience demonstrates on the ground. Those who take low-wage jobs at any point experience depressed incomes for the rest of their lives. Jobs eliminated by a minimum wage are not an opportunity, but a trap.
Higher wages stimulate growth
This concept should be easy for a Republican to understand. The mechanics are very much like the effect of a tax cut in a supply-side scenario, except that raising wages actually works. When working people earn more money they spend more money. The money they spend feeds economic growth. Unlike tax cuts, this economic growth is accomplished without ruining public finances. As a consequence, while higher wages might cause some jobs to disappear, it tends to foster the creation of new, higher earning jobs.
Instead of two parents and their two children all having to work to make ends meet, three jobs might be eliminated. One, much higher-paying job might replace those three and be enough to support the whole family. Children can further their education. A parent might have time to care for the kids. And value is created all up and down the economy and the culture. See how easy that was?
Okay smart-ass, why shouldn’t the minimum wage be $35, or $100 an hour?
Maybe it will be some day, but like almost any innovation it pays to embrace evolution over revolution. It would take time to replace or automate every activity that currently pays between $10-20/hour. The capital investment cycle is not instantaneous. In theory, a large disruptive move could create long lags between the destruction of low value jobs and their replacement with higher-value activities. Given that assumption it makes sense to have a minimum wage set on an index which allows it to slowly climb over time.
We have implemented the opposite arrangement. US minimum wages have been in steady decline for the past forty years, dropping over 10%. That doesn’t make any sense, though it explains a lot.
When government intervenes in very small ways to create a credible market for employment, everybody wins. A minimum wage is a very simple way to build a richer, more dynamic economy with only a very light government intervention. Repealing the Federal minimum wage is one of the stupidest and most politically crippling ideas to emerge from the Neo-Confederate renaissance. Can we please stop talking about this and move on?