Alex Biles: Paid with good intentions

BY ALEX BILES

Published February 2, 2010

Sometimes, the best intentions can backfire. Like in ninth grade when I wrote a love letter to this girl I had a crush on. That didn’t work out very well. Or when I worked at Wal-Mart and tried to help a man retrieve keys he had locked inside his car – only to damage the car. These unintended consequences to the most altruistic plans are also commonplace in the actions of policymakers.

Let’s take the minimum wage law, for instance. Many attribute a sort of sanctity to minimum wage and don’t dare question its existence. But the truth is minimum wage effectively prohibits people from working.

Mandatory wage increases create unemployment by pricing low-skill jobs out of the labor market in place for capital. This is evident in the systematic disappearance of jobs like luggage carriers at airports. In this case, labor has been substituted with rental pushcarts because it’s too expensive to hire individuals.

A basic understanding of economics explains this phenomenon through supply and demand. The implementation of a price floor above the market equilibrium price will result in a labor surplus – also known as unemployment.

Our policymakers have essentially made it impossible to work if your skill set doesn’t warrant the arbitrary wage that they have foolhardily determined. There are no longer people who pump your gas or ushers who guide you to a seat in movie theaters. Markets where groceries are carried out to people’s cars by teenagers are a dying breed. Minimum wage laws have put businesses in a position where they cannot afford to hire low-skill workers.

Suppose I can hire a high-skilled roofer who charges $20 per hour, but I could hire three low-skilled roofers who can do the same quality job and pay them $6 per hour instead. Then, assume a minimum wage of $8 per hour is mandated. Now that the aggregate cost of hiring three low-skilled workers is $24, it would be silly for me not to hire the high-skilled roofer.

This would also allow the high-skilled roofer to increase costs for consumers by driving up his fee to $23 per hour. Hiring him is still cheaper than three low-skilled roofers. Yet, because of the minimum wage, the consumer ends up having to subsidize a price increase at the behest of the roofer. In this sense, minimum wage is a hidden tax, increasing costs for consumers.

And minimum wage favors large corporations that can deal with the burden of incremental wage increases better than “mom and pop” stores that don’t possess as much financial capital. Often, small businesses must raise prices in order to meet minimum wage requirements. This distorts market forces, giving corporations an advantage.

By any measure of reason, the concept that you should raise wages simply by passing a law is preposterous. Increased wages should come from increased productivity. After all, people who climb the socioeconomic ladder in this country do so because of self-improvement and hard work – not because of the minimum wage.

And despite well-intentioned rhetoric behind minimum wage, people fail to identify special interests behind the law, like political motives. Earning votes isn’t too difficult when you can take credit for raising the wages of the poor — especially when also disregarding the number of people who are priced out of work.

Additionally, union leaders have powerful lobbying at their disposal. Trade union leaders, who consistently push for tougher immigration laws and restrictions on free trade, have a history of fearing competition from low-wage workers. High-level members want to maintain their wages above those of low-skill members.

So what about the poor? Research conducted in 2006 at the University of California, Irvine discovered that for every 10-percent increase in minimum wage, the poverty rate increases by 3 to 4 percent (Source: http://www.cato.org/pub_display.php?pub_id=6484). Many other studies have shown that the minimum wage is disproportionately detrimental to African Americans (Source: http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm). Contrary to popular belief, the people that minimum wage hurts most are precisely those who it claims to help: the poor.

If the government wants to help the poor, the best thing it can do is abolish the minimum wage. As China and India have recently learned, policy that promotes competition and choice, reduces taxes and protects private property rights is most conducive to stimulating economic growth and increasing standards of living for the poor.

Beyond the absurdity of minimum wage, we must recognize the threats derived from the negative consequences of well-intentioned policy. We can reduce these social costs by limiting the size and scope of government, as well as thinking twice before implementing legislation. We should share the concerns of policymakers and admire them for the softness of their hearts. Unfortunately for many policymakers, this softness often extends to their heads.

Alex Biles can be reached at jabiles@umich.edu.