Watching Robert Reich’s new video in which he endorses raising the minimum wage by $7.75 per hour – to $15 per hour – is painful. It hurts to encounter such rapid-fire economic ignorance, even if the barrage lasts for only two minutes.
[...]I usually have pretty good success (at least temporarily) with my liberal friends when I attack their love of things like living wage laws by introducing the idea of the marginal. The marginals are 1) the companies waiting to be born and looking hard at whether the numbers add up. 2) The companies on the cusp of failure and closing who are looking at how to make the numbers add up. 3) The companies looking to expand or hire one more employee and are looking at whether their labor will be worth the cost. And 4) companies looking to contract or lay off one employee and are looking at whether their labor is worth the cost.
By completely ignoring elasticity, Reich assumes his conclusion. That is, he simply assumes that raising the minimum wage raises the total pay of unskilled workers (and, thereby, raises the total spending of such workers). Yet whether or not raising the minimum wage has this effect is among the core issues in the debate over the merits of minimum-wage legislation. Even if (contrary to fact) increased spending by unskilled workers were sufficient to bootstrap up the employment of such workers, raising the minimum wage might well reduce the total amount of money paid to unskilled workers and, thus, lower their spending.
So is employers’ demand for unskilled workers more likely to be elastic or inelastic? The answer depends on how much the minimum wage is raised. If it were raised by, say, only five percent, it might be inelastic, causing only a relatively few worker to lose their jobs and, thus, the total take-home pay of unskilled workers as a group to rise. But Reich calls for an increase in the minimum wage of 107 percent! It’s impossible to believe that more than doubling the minimum wage would not cause a huge negative response by employers. Such an assumption – if it described reality – would mean that unskilled workers are today so underpaid (relative to their productivity) that their employers are reaping gigantic windfall profits off of such workers. But the fact that we see increasing automation of low-skilled tasks, as well as continuing high rates of unemployment of teenagers and other unskilled workers, is solid evidence that the typical low-wage worker is not such a bountiful source of profit for his or her employer.
It is among these companies that growth and contraction happens. These are often small, single location family businesses that have great hopes and tight budgets.
When I put it that way, sometimes the scales fall away from the eyes of my friends, and they admit that maybe the price of the law is greater than its benefits.
The problem is, as soon as our conversation is over, they tend to revert right back to their old thinking. The knowledge never seems to stick.