Matthew Zabka: Not so simple

BY MATTHEW ZABKA

Published July 15, 2012

In June, state Sen. Bert Johnson (D–Detroit) introduced a bill that would raise Michigan’s minimum wage to $10 per hour by 2015. He claimed in a press release that a higher minimum wage would improve standards of living and stimulate job creation. At first glance, this seems to make sense. If all workers who make the current minimum wage of $7.40 per hour instead made $10 per hour, their standards of living would go up. How could anybody be against higher standards of living?

While Johnson goes on to imply that Republicans’ opposition to his bill is hurting working families, the economics of minimum wage is — at least at first glance — counterintuitive, and there are sound economic reasons for opposing higher minimum wage.

Every introductory economics textbook uses a basic example — typically an employer who is unwilling to hire an employee for a certain wage — which demonstrates that minimum wage distorts market equilibriums. In particular, minimum wage increases unemployment.

Even worse, those hit hardest by minimum wage are almost always the poor. Since Java programmers, rocket scientists and professional football players have more lucrative options, they aren’t willing to sweep floors for $6 per hour. When minimum wage increases, it is the unskilled workers who are left jobless.

Most economists follow this standard theory, but to be fair, there are a few scholars who believe that increasing the minimum wage does not increase unemployment. While supporters of minimum wage love to sing the praise of the minority of economists who doubt whether minimum wage increases unemployment, these supporters’ actions often sing a different tune.

Remember the Association for Community Organizations for Reform Now, the former collection of community-based organizations and frequent supporter of raising the minimum wage? In the ’90s, ACORN filed a court brief seeking to exempt itself from a new, higher minimum wage that stated, “The more that ACORN must pay each individual outreach worker — either because of minimum wage or overtime requirements — the fewer outreach workers it will be able to hire.” So ACORN supported minimum wage — as long as it didn’t have to pay their workers the minimum wage.

More recently, the last national minimum wage increase applied to all U.S. states and territories — except for a special exception for the tiny island territory of American Samoa, 40 percent of whose workforce worked in the tuna canning industry. Some speculate that since the tuna canneries’ firms were based in then-Speaker of the House Nancy Pelosi’s (D–Calif.) district, she inserted the special provision to avoid what she knew would lead to a less competitive tuna industry. When the press pointed out this exception, an embarrassed Pelosi asked Congress to include Samoa in the minimum wage increase.

Whether the former speaker was responsible for the attempted kickback may never be known, but the effect that a higher minimum wage is having on the no longer exempt American Samoa is certain. In 2010, Chicken of the Sea closed its canning facility and displaced more than 2,000 workers, a whopping 3 percent of American Samoa’s population. In one of its last acts, the 2010 Congress — overwhelmingly filled with representatives who have loudly supported a higher minimum wage — quietly voted 386-5 to delay any further minimum wage increase for American Samoa.

Both economic theory and real-life observations suggest that raising the minimum wage increases unemployment, but it’s hard to fault policy makers like Johnson for seeking to increase the minimum wage when that’s what his constituents want. So it’s important for citizens to be either informed voters or uninformed non-voters.

Matthew Zabka can be reached at mzbka@umich.edu. Follow him on Twitter at @MatthewZabka.