I’ve written at least a dozen posts over the past five years on the folly of the minimum wage. (For a few examples, see here, here, here, and here.) As such, I was reluctant to write yet another post about this intellectually indefensible pet cause of the left. But after the latest idiocy emanating from the Obama Administration, I couldn’t resist.
For a little background, in the run up to the 2014 midterms, Obama and his fellow travelers on the left have been trying mightily to divert the public’s attention from the ObamaCare debacle, unsustainable debt accumulation, Scandalmania, and the general disaster that is the Obama economy. Central to this effort has been Obama’s sudden concern about inequality which, ironically has only accelerated under his policies. As we head toward the election, “let’s give America a raise” has become the distraction of choice since it will likely appeal to the low-information voters upon which the Democrat Party relies to win elections.
So yesterday, when the CBO released a report indicating that this ill-conceived scheme will throw an additional 500,000 souls out of work by 2016, Team Obama was forced into damage control mode. Jason Furman, the chair of Obama’s CEA, was hastily dispatched to counter the report. Furman, you’ll recall, twisted himself in knots two weeks ago when asked to conduct similar damage control on the CBO’s prediction that Obamacare will result in 2.5 million fewer “full-time equivalent” jobs. Yesterday’s defense of a 40% hike in the minimum wage while the nation suffers through an intractable dearth of job creation was even more bizarre. Let’s take a look at a few highlights, shall we. First, Furman claims the CBO’s economists are somehow not up with the times, that the new, enlightened state of the art is that raising the minimum wage is a free lunch. Or something.
…the overall consensus view of economists which is that raising the minimum wage has little or no negative effect on employment.
So, presumably, all that economic theory about government imposed price floors resulting in surpluses is passé. To back up this ludicrous claim, Furman points to a letter signed by 600 liberals who cite Tom Harkin and George Miller as model legislators. Furman goes on to cite the widely-panned, fatally flawed Card-Krueger study from the 1990s which also essentially made the same ridiculous claim. (Krueger, incidentally, was Furman’s predecessor at the CEA.) This is utter rubbish of course, as the labor market is not immune to the law of demand. And the White House knows this. Take cigarettes and energy. The left pushes ever higher taxes on cigarettes in an effort to discourage smoking. They’ve admitted that their green energy schemes will never work unless conventional energy prices “necessarily skyrocket” in the hopes that consumers will then choose solar-powered cars over gasoline-powered cars that actually work. In both cases, they’re acknowledging that higher prices will result in less demand. But somehow they want us to believe that arbitrarily raising the price of unskilled labor will not reduce demand. The business owners I know will be quite surprised by this sage insight.
This statement by Furman is priceless:
Overall the logic for the finding that raising the minimum wage does not result in large adverse impacts on employment is that paying workers a better wage can improve productivity and thereby reduce unit labor costs.
Of course. Being forced to pay a higher price for unskilled workers will magically make those workers more productive. That’s like saying we can make a washing machine more efficient by raising its price, or make a bottle of Two-Buck Chuck taste better by increasing its price. This is a classic “putting the apple cart before the horse” fallacy. While increasing productivity leads to higher wages, higher wages does not automatically result in higher productivity. When individual workers are more productive, employers will gladly increase their pay rather than lose them to a competitor. It’s expensive to identify and hire qualified workers. This is a cost any sane business wishes to minimize to the extent possible, as Furman acknowledges.
But raising the minimum wage to $10.10 an hour effectively makes it illegal for a business to retain or hire those workers whose productivity is below that floor. That’s a lot of workers; most of whom are the very people Obama’s minimum wage snake oil purports to help. What happens to them? If you think the teen unemployment rate is high now, wait until the minimum wage is $10.10 an hour. How could any business possibly afford to hire a teen, seeking his first job, with no skills or experience and pay him (or her) that much? Keep in mind that when payroll taxes are included that $10.10 rises to between $11 and $12 an hour. In order to be employable, workers must be at least that productive. Simply raising their pay by government fiat does nothing for their productivity. This is not complicated. Unless, evidently, you work in the Obama Administration where productivity and competence is a foreign concept (see Sebelius, Kathleen).
In addition, businesses can adjust in other ways rather than reducing employment (for example, by accepting lower profit margins).
Oooooh-kay. At least Furman is admitting that arbitrarily raising labor costs by 40% comes at a cost. But no problem, businesses can “adjust” by simply “accepting” a lower profit margin. Well, forcing businesses to overcompensate unskilled workers will certainly lead to lower profit margins which, presumably, Furman’s fine with. Profits are evil in this administration’s mind. Just one small problem, though: Profitable firms tend to be the ones most likely to expand and create jobs. Those with declining profits are the ones most likely to close their doors and/or eliminate jobs. It’s truly chilling how cavalierly the White House dismisses the necessity for a business to earn a profit, and that they think they can dictate what the correct amount of profit a firm is allowed to earn.
Of course, according to Furman, businesses can adjust to a dramatic increase in their labor costs in other ways, too. Grocery stores and other retailers, for example, can accelerate their trend toward fewer cashiers by purchasing more self-checkout machines. The higher labor costs become, the more economic sense those machines make. The government doesn’t fix their prices above market, they don’t require ObamaCare, and they never, ever, call off sick.
The bottom line is that the increased wages businesses will be forced to pay (those lucky enough to keep their jobs, that is) must come from somewhere. Again, there’s no free lunch. Unlike the Fed, businesses can’t print money out of thin air. Businesses aren’t charities, and they won’t reduce their already paper-thin profit margins to help the White House out with their latest pet cause. They’ll simply hire fewer workers, reduce the hours of those whose productivity doesn’t justify the 40% wage hike or eliminate their jobs completely. Assuming they want to remain viable, they have no choice in the matter.
Another of Obama’s alleged economic advisors, Gene Sperling, doubled down on this minimum wage idiocy today, arguing that, like with ObamaCare, a higher minimum wage is a fantastic idea because it will allow will “allow” some Americans to work less. He’s right. According to the CBO, at least 500,000 will be working less. Indeed they won’t be working at all. But it won’t be their choice. We’re in good hands, folks.
Update: Here are a couple excerpts from an excellent Pittsburgh Tribune-Review editorial on the above topic:
Obamanomics is a particularly pungent “progressive” economic philosophy whose devotees fervently believe that government can command the economy, much as a wizard magically makes all well in a Saturday morning cartoon. Not only are the immutable laws of economics not applicable, they are openly derided…
On Tuesday, the Congressional Budget Office (CBO) stated the obvious: The Obama administration’s proposal to raise the federal minimum wage by 40 percent — from $7.25 an hour to $10.10 — would lead to the elimination of 500,000 jobs and leave up to 1 million people unemployed.
The chief mouthpiece for Obamanomics, Jason Furman, chairman of the White House Council of Economic Advisers, was quick to tut-tut it all with his wacky wizard’s wand, citing a mythical “consensus view of economists” in a “bulk of academic studies.” Others impugned the credibility of the CBO, never mind that this supposedly nonpartisan office often leans to the left.
The bottom line, concludes Michael Saltsman, research director of the Employment Policies Institute: The truly impoverished will not enjoy a large share of any higher earnings but they will bear the brunt of increased unemployment.
Click here to read the whole thing.