Wishful Thinking on the Minimum Wage

Economics was dubbed "the dismal science" because it is constantly at war with one of life’s most pleasant occupations — wishful thinking. Suggest a simple step to make people better off — say, by freezing gasoline prices — and economists will dourly explain why it will have unintended consequences that outweigh any benefit. They’ve also been known to visit kindergarten playgrounds and announce there is no Santa Claus.

But a group of reputable scholars is trying to put a happy face on economic realities. They say the government can decree higher pay for the least-compensated employees and the only consequence will be the intended, benign one.

The Economic Policy Institute, a Washington research group, recently unveiled a newspaper ad trumpeting a statement signed by some 675 economists who endorse raising the minimum wage from $5.15 an hour to $7.25. Among the signers are Nobel Laureates Kenneth Arrow, Clive Granger, Lawrence Klein, Robert Solow and Joseph Stiglitz.

A generation ago, it was universally agreed, even among liberal economists, that raising the minimum wage was a mistake because it would produce higher unemployment. Force companies to pay the lowest-skilled workers more than they are worth, and companies will get rid of them. In this view, it’s better to have a job that pays $5 an hour than to lose one that pays $5.15.

That insight violated, but didn’t curb, the perennial liberal desire to pursue social improvement at other people’s expense. In the past, Democrats boosted the minimum wage in stubborn disregard of the wisdom of academia. Lately, though, they have been able to brandish studies alleging that in the real world, an increase doesn’t raise unemployment and may reduce it.

In fact, the notable research merely showed that a higher minimum wage failed to raise unemployment in the fast food industry, not that it failed to destroy jobs in general. But whatever their shortcomings, the studies made it respectable for economists to echo the old Michelob slogan: "Who says you can’t have it all?"

The economists’ statement is carefully hedged, quoting from the 1999 Economic Report of the President: "The weight of the evidence suggests that modest increases in the minimum wage have had very little or no effect on employment." Put more succinctly, a small increase may cause a small increase in unemployment.

But small increases also provide only small benefits, at least to the workers who keep their jobs. And the change the economists endorse is not a modest one. It would lift the floor from $5.15 to $7.25 — a 40 percent increase — in the space of 26 months.

If the federal government sought to discourage the hiring of low-skilled workers by making employers pay a 40 percent tax on their wages, no economist would expect low-wage employment to grow or remain the same. But that’s exactly how this proposed change would work.

Supporters insist employers will reap benefits in lower turnover and reduced costs for training new workers. But if businesses could make more money with that tradeoff, the government wouldn’t have to force them to do it — greed would be motivation enough.

Despite the minority view expressed in the ad, Hoover Institution economist David Henderson says the consensus in the trade is that each 10 percent add-on would destroy 1 to 2 percent of young people’s jobs. So a $7.25 minimum wage could mean the loss of up to 1.6 million positions.

That may seem a small price to pay for enlarging the paychecks of millions of other workers. Sen. Edward Kennedy, D-Mass., thunders, "It’s a travesty that a family of three earning the minimum wage works five days a week all year round yet still lives below the poverty line."

But he has taken some liberties with the truth. A family of three with one parent working full-time and the other half-time, both at the minimum wage, gets $15,450 a year in wages, less than the poverty level of $16,600. But, notes John Wancheck of the Center on Budget and Policy Priorities, that family also qualifies for the federal Earned Income Tax Credit and (with a child under 17) the child-care tax credit, bringing total take-home income to $17,638.

That’s still a modest amount, but more than this family will earn if one of its members is unemployed. And chances are good that economists have been right all along in expecting such consequences. It may be deeply unwelcome to hear that the government can’t fix the price of anything without self-defeating side effects. But even dismal truths are true.