It’s the talk of the town!
Council members for the city of Los Angeles are doing it. Two representatives of Congress have proposed it. Presidential candidate Hillary Clinton tells fast-food workers they deserve it.
Everyone must think it is a good idea.
When you talk to many economists, however, you will find that no matter what these politicians say, raising the minimum wage has serious consequences – both economically and morally.
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I was recently asked to discuss this issue for the New Leadership Conference at Boise State University, a six-day summer institute for college students from across the state focusing on women’s leadership and civic participation. Conference attendees were asked to consider the pros and cons of a minimum-wage increase, likely the same arguments Idaho legislators will consider if they take up this issue in 2016.
Economic theory and empirical research shows that there are three primary consequences of an increase in minimum wage laws: higher unemployment, greater income inequality and more uninsured workers.
Workers who keep their positions after a minimum-wage hike are better off, but unemployment rises, particularly among those with fewer skills. In 2014 the Congressional Budget Office reported that an increase of the federal minimum wage over three years to $10.10 per hour from $7.25 would reduce total employment in the United States by as much as 1 million workers.
The higher cost of labor increases the incentive for business owners to use more capital. French economist Thomas Piketty has shown that when the returns to capital exceed the rate of growth in the economy, income inequality increases.
Finally, while some employers substitute capital, other firms can be expected to reduce employees’ non-wage benefits. This would have the effect of increasing the number of uninsured people, taxing our health-care system even further.
Many policy makers look past these consequences and push for a higher minimum on moral grounds. Proponents often point to a social and ethical responsibility businesses have to pay their workers well. It is said that large businesses in particular can afford to pay more.
However, when you impose a moral obligation on group people such as owners of a corporation, then you must impose the same argument in all cases for all groups. Otherwise, you are guilty of showing partiality in justice, which is immoral.
To be consistent, you would also have to argue that the government has a right to tell businesses what they must charge for their products and services. You would also have to argue that the government has right to tell parents how much they should pay the neighbor kid to mow the lawn or babysit. If you single out only wage contracts as a place where government mandates are morally justified, you are guilty of faulty moral reasoning.
No matter what the talk, lawmakers should not increase minimum wage. The economic and moral consequences are too severe.