More Minimum Wage Malarkey

Robert Reich, who was Secretary of Labor under Bill Clinton, and who is currently a professor at Berkeley, made a “put it to rest” pronouncement regarding raising the minimum wage, offering 7 reasons why it should be $15 per hour. I was going to comment only on the most egregious one, but the entire package is so brain-numbingly daft that, in the end, I opted to give it fuller attention.

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Had the minimum wage of 1968 simply stayed even with inflation, it would be more than $10 an hour today. But the typical worker is also about twice as productive as then. Some of those productivity gains should go to workers at the bottom.”

This presumes that the starting point was a correct and valid one i.e. that the 1968 minimum wage was a good idea. Build a structure on a sandy foundation, it’s not going to last.

It presumes that the correlation between productivity and compensation remains constant, By that logic, a secretary with a word processor and a high speed printer should be receiving 10x-100x the compensation of the secretaries in the typing pools of yore.

It presumes that the productivity gains of typical workers are sufficiently constant as to cover minimum wage workers. But, minimum wage workers are typically the least skilled, and many productivity gains derive from improved tools. If someone can wrangle Excel spreadsheets or word processor software with the typical skill of workers who are paid to use them, that someone doesn’t end up in a minimum wage job. Inflating the minimum wage to the point where it is as high as the “natural” wage for those jobs creates problems rather than solving them.

It also presumes that productivity gains have gone to profits that are available for wages. Could it be possible that many of these productivity gains derive from better tools? Tools that cost money to acquire, maintain and upgrade? Could it be possible that many of these productivity gains have passed through to consumers in the form of lower prices or better products for the price?

On this point, Reich’s either deliberately deceiving, willfully blind or just economically illiterate.

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$10.10 isn’t enough to lift all workers and their families out of poverty. Most low-wage workers aren’t young teenagers; they’re major breadwinners for their families, and many are women. And they and their families need a higher minimum.

Despite the inclusion of numbers and the word “poverty,” this is not an economic argument. It is a social policy statement, it is a piece of dogma, it is an appeal to emotion. And, it uses a statement about “most low-wage workers” that’s extremely misleading. First, “young teenagers” don’t work, they go to school. Second, “major breadwinners?” Really? The only dodge I can think of is that he’s including service and hospitality in his pronouncement. The people who serve you food in restaurants do get paid minimum wage, but they also earn tips – tips that in many places substantially exceed their wage compensation. But, to repeat, this statement is an emotional justification for redistribution, not an economic argument.

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For this reason, a $10.10 minimum would also still require the rest of us to pay Medicaid, food-stamps, and other programs necessary to get poor families out of poverty – thereby indirectly subsidizing employers who refuse to pay more. Bloomberg View describes McDonalds and Walmart as “America’s biggest welfare queens” because their employees receive so much public assistance. (Some, like McDonalds, even advise their employees to use public programs because their pay is so low.)

Does anyone seriously believe that this government has any interest in reducing public assistance, or that it will actively work to remove people from the welfare rolls if it gets its minimum wage passed? Lest we forget, the government decides what the poverty line is, and today’s “poor” who receive public assistance live at standards that far, far exceed those of half a century ago.

Note also the accusation of subsidies. It’s a sneaky one, not only because it conflates any employer who hires low wage workers with the cronyists who are so deservedly reviled nowadays, but because it suggests that businesses have a choice in the matter. Businesses aren’t government. They aren’t monopolies that get to force their product on consumers. They compete in an environment that most of them have very little influence over, and to create a passel of social programs then declare that businesses are “subsidized” by them is sophistry.

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A $15/hour minimum won’t result in major job losses because it would put money in the pockets of millions of low-wage workers who will spend it – thereby giving working families and the overall economy a boost, and creating jobs. (When I was Labor Secretary in 1996 and we raised the minimum wage, business predicted millions of job losses; in fact, we had more job gains over the next four years than in any comparable period in American history.)

For a man who spoke of productivity just three points ago, he sure doesn’t understand it. Money doesn’t grow on trees (unless you’re the Federal government, but that’s another issue) and money that’s reallocated by legislative fiat is money that’s not being governed by the brutal and indifferent efficiency demands of the free market. Misallocation of resources harms productivity, reduces economic growth and reduces living standards for all. And, with a minimum wage in place, it forces employers to employ some and lay off others. As for the final sentence – correlation is not causation, and a simplistic two variable analysis in a matter of national macroeconomics is an insult to the reader. Lest we forget, the late ’90s was the era of the technology revolution dot-com bubble, and all sorts of inefficiencies can easily be masked by a short-term boom.

Reich also ignores the massive body of scholarship, including reports from the Congressional Budget Office and lessons from Economics 101, in making his pronouncement that higher minimum wages don’t cost jobs. He’s guilty here of the worst sort of cherry-picking and false correlation, and relies on (I presume) his resume and a willing audience for it to slide unchallenged.

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A $15/hour minimum is unlikely to result in higher prices because most businesses directly affected by it are in intense competition for consumers, and will take the raise out of profits rather than raise their prices. But because the higher minimum will also attract more workers into the job market, employers will have more choice of whom to hire, and thereby have more reliable employees – resulting in lower turnover costs and higher productivity.

This is the “shake my head in disbelief” point. Does that “intense competition” not exist at the moment? Does it only appear if the minimum wage is doubled? Does Reich truly believe that business owners are sitting on great big bushels of excess profit? That they’d be content staying in business if that profit was halved? Wouldn’t the “intense competition” of the marketplace have already driven profits down to minimally acceptable levels for those business owners?

The second half of this makes a strong unintentional point against the minimum wage. Raise the minimum wage, and the lowest skill workers are going to get displaced by more skilled and more reliable workers. It also makes a false presumption – that minimum wage job productivity can benefit significantly from better workers. But, consider a dishwasher in a restaurant? How much more efficient can he be? And, if he is indeed that much more efficient, wouldn’t the restaurant owner need fewer dishwashers to get the job done? Furthermore, he himself is pointing out that the least capable candidates will be crowded out by those who wouldn’t take the lowest skill jobs unless they paid $15 an hour. The workers who are most in need of an entry level job to build up a skill set and work experience are the most punished by a higher minimum wage.

Some ideas are so stupid that only intellectuals believe them.
— George Orwell

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Since Republicans will push Democrats to go even lower than $10.10, it’s doubly important to be clear about what’s right in the first place. Democrats should be going for a higher minimum rather than listening to Republican demands for a smaller one.

What’s “right” in what sense? Is he making an economic argument or a moral one? Either way, this is politics. It isn’t a supported argument for a higher minimum wage.

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At a time in our history when 95 percent of all economic gains are going to the top 1 percent, raising the minimum wage to $15 an hour isn’t just smart economics and good politics. It’s also the morally right thing to do.

“Economic gains” is a nice bit of sleight-of-hand. It falsely conflates income distribution with economic gains, when “economic gains” is a far broader measure than simply dollars in pockets. It also sounds professorial, and that makes it an appeal-to-authority. The entire statement, however, has no logical validity, it is simply a declaration of moral authority to involve the government in the employer-employee contract, to direct how capital is used, and to lay claim to that which some have earned for the purposes of giving it to others.

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We already know Reich is an unrepentant statist and redistributionist. He can put his “logic” and reasoning into list and bullet form to give it more gravitas and a greater air of scholarship, but that doesn’t make it any more valid. He can word-smith his arguments and wrap up false presumptions and emotional arguments with pretty ribbons and highfalutin concept, but that doesn’t make them any stronger. His arguments about how money and jobs will reallocate with a higher minimum wage is entirely wishful thinking, unrooted in logic or actual experience running a small business. His desired goal will harm the very people it purports to help – the least skilled, the lowest-earning, and those newest to the labor force. It will make their ascent out of the minimum wage tier that much harder, and because it’ll be harder fewer of them will succeed and more will remain part of the growing “permanent underclass” that’s decried by politicians of all stripes.

Decried, but in different ways and for different purposes. Statists refuse to accept the role of the State in perpetuating this underclass, and demand even more State be invoked to resolve it. Small-government people, those who love liberty and those who set emotion aside correctly note that so much of what the State has done has expanded the “permanent underclass,” created a culture of dependency and entitlement, and that further involvement will only make things worse. The politically cynical and opportunistic see this permanent underclass as a power base, and will bend the arguments of everyone else to advance themselves and their causes.

The morally righteous crusaders, those who see the existence of any sort of economic lower class as a call to duty and an authorization to act, will start with a certainty that their solution is the correct one, and work backward to justify it. Reich comes across as one of these – using whatever type of argument is convenient to advance a policy he’s certain will do Good. The lack of logic, fact or validity of those arguments seems irrelevant.