Yesterday I mentioned that translating economic principles into intuitive concepts is one of the most urgent and necessary tasks to prevent such evils as harm to the poor. Today, William Poole provides an excellent example of what is needed with his “common-sense thought experiment” on minimum wage increases:
Suppose Congress were to enact a minimum wage $50 higher than the current one of $7.25 per hour. Would a minimum of $57.25 reduce employment? I know of no economist who would assert a zero effect in this case, and recommend that readers ask their economist friends about this thought experiment. Assume that the estimate is that a minimum of $57.25 would reduce employment by 100,000. The actual number would be far higher but 100,000 will do for this thought experiment. Now, consider several other possible increases of less than $50. The larger of these increases would have substantial effects, the smaller ones smaller effects.
But is there reason to believe that a minimum of $10 would have no effect? I have never seen a convincing argument to justify that belief. If you accept as a fact that a minimum wage of $57.25 would reduce employment, and you accept as a fact that some workers are currently paid $7.25 per hour, then logic compels you to believe that a small increase in the minimum wage above $7.25 will have at least a small negative effect on employment.
The only escape from this logic is to believe that there is a discontinuity in the relationship between the minimum wage and employment. No one has offered evidence that there is a discontinuity at a certain minimum wage such that a minimum above that has an effect and one below does not.
Far too often, advocates of minimum wage increases tend to dismiss such thought experiments before giving them due consideration. I think I know why. I don’t mean to cast aspersions on their motives (it certainly sounds like I’m about to cast aspersions on their motives, doesn’t it?), but I suspect they fear that admitting the undeniable logic of this reasoning will cause them to lose the moral high ground.
As I’ve said before, almost everyone on both sides of this issue share a common objective — helping the working poor. But there is something about putting more money into the pockets of the working poor that just feels more noble. It also feels wrong to tell a minimum-wage earner you oppose a government-mandated pay increase.
Of course when it comes to their own money, their feelings give way to rational economic self-interest. Here’s an example of what I mean. Since the median household income in America is around $51,000, almost every middle-class household could technically afford to pay someone $10 an hour to do 10 hours of work a week ($100 a week, $5,200 a year).
Now let’s say you and three of your friends decide to chip in to hire a worker. Each of you will pay for 10 hours of her labor so that she gets 40 hours of work a week. The total pay ($20,800) would be enough to bring a single mother with two kids above the poverty line. Sounds like a great deal for everyone, right? So why don’t you do that?
I suspect you’ve already started churning out a list of reasons why such a plan isn’t feasible. Some of those reasons probably include:
“I don’t have any work that needs doing that is worth $10 an hour.”
“I’d rather spend $100 a week on my own family.”
“The time it’d take to supervise and manage the worker wouldn’t be worth the hassle.”
“Once you factored in the payroll taxes the cost would be much more than $10 an hour.”
All of these excuses are legitimate and rational. For most of us, not hiring a minimum-wage worker is in our best interest. Yet many individuals seem to think business owners will act completely differently. The assumption is that there is something unique about owning a “business” that causes people to look at time and value in a completely different manner. Of course, that isn’t the case, which is why most business owners would simply do what all of the rest of us do – not hire people when we find the price of labor is higher than the value of the labor.
And who are the workers that won’t get hired at the higher labor cost? Those who most need the work – the poor, untrained, uneducated, and unskilled. Supporters of minimum wage increases are saying that those people should remain without a job so that other workers can get a pay raise. But are minimum wage advocates willing to tell that to those who can’t get a job? As Poole asks, “Will those advocating a higher minimum wage be willing meet face to face with disadvantaged members of society, who are willing and able to work, and explain why their employment needs to be sacrificed for higher wages for those who remain employed?”
