Do minimum wage laws help achieve the goal of less poverty? Does it make sense to impose on businesses the cost of achieving social goals? And, is every laudable social goal affordable?
These are the questions we should be asking the next time calls for a minimum wage hike surge, writes Philip Cross.
By Philip Cross, Feb. 8, 2017
The widening gulf between the Trump administration and the interventionist bent of governments here in Canada was reflected once more in his nomination of Andrew Puzder as U.S. Labor secretary. Previously, Puzder was head of the CKE fast-food chain (it owns Carl’s Jr.) with 70,000 non-unionized employees. His record of opposing higher minimum wages suggests the chances the U.S. is going to follow provinces like Alberta and Ontario and legislate national minimum wage hikes are non-existent. Paradoxically, lower income earners in the U.S. may fare better as a result than in Canada.
To understand the purpose of government legislation, it helps to revisit its origin. With minimum wage laws, the beginning is sordid indeed. Then president Franklin Roosevelt brought in minimum wage legislation in the 1930s, decades before European countries (Britain did not have one until 1999; Germany waited until 2014 — yes, civilized and prosperous countries can avoid legislating a minimum wage). Washington’s intent was to exclude certain groups from the labour force, not reduce poverty. Thomas Leonard in a 2005 article in the Journal of Economic Perspectives documented how minimum wage laws were openly intended as a “crude eugenic sorting of groups into deserving and undeserving classes,” designed to price women, immigrants and blacks out of the labour force. The original calculation, in Leonard’s words, was “that job loss induced by minimum wages was a social benefit ridding the labour force of the ‘unemployable.’”
Worse than being inherently exclusionary, minimum wage legislation reinforces several erroneous myths in our society about economics.
Today, minimum wages serve the same purpose. Only, instead of discriminating by race or gender, the main impact is on youths, especially teenagers who are priced out of the labour market when forced to compete head-on with adults. Studies show that the more hours youths work, the better their long-term outcomes. Getting that first job teaches someone struggling to enter the labour market the importance of showing up for work on time, getting along with co-workers, accepting direction and learning how their own time and effort create value.
Worse than being inherently exclusionary, minimum wage legislation reinforces several erroneous myths in our society about economics. It implies that high wages create prosperity, when it is prosperity that creates high wages. Raising wages to levels mandated by ideology, rather than those justified by productivity, is a recipe guaranteed to raise joblessness among the segment of our society that most needs to gain a toehold in the labour market to begin scaling the income wall.
Another fallacy encouraged by minimum wage laws is that outcomes are determined by collective and not individual acts. As a society, we want to create the incentives for people to pursue actions that will lift them out of low income, such as working hard, demonstrating initiative and enterprise, and obtaining a good education. In the words of renowned economist Thomas Sowell, “There are no dead-end jobs. There are only dead-end people.”
Inflammatory rhetoric about wages and social justice distorts the public debate. Constantly tugging on emotional heartstrings with appeals that everyone should earn a “living wage” invites William F. Buckley Jr.’s exasperated rejoinder in 1967 that if people earned a minimum wage that fell below this so-called living wage “Why, under the circumstances, weren’t they dead?” Some debates go on forever.
However, there really should be no debate about the pernicious effect of higher minimum wages on employment. A survey found that 85 per cent of economists in Canada and 90 per cent in the U.S. agreed the minimum wage increased unemployment among low-skilled workers, the very group they are intended to help.
So why is the matter debated endlessly, especially among non-economists? Because the negative impact of minimum wage hikes is dispersed over long periods. It is a classic example of what 19th-century economist Frederic Bastiat called “that which is seen and that which is unseen.” Naïve analysts look at the level of employment in the period just after a minimum wage hike, as if that is enough to judge whether or not it had a negative impact. (A Statistics Canada analyst recently fell into this trap, offering the same kind of inane analysis that leads people to question whether Statcan should be providing off-the-cuff punditry, and still others to long for a return to the days when such analysts were muzzled).
Sowell outlined how increases in business costs such as wages or taxes induce firms to respond in stages. Besides laying-off workers immediately — the simplistic response imagined by some as the end of the adjustment process — companies can slow hiring, gradually substitute capital for labour, and eventually shift operations to lower-cost jurisdictions. These changes occur gradually over time, much as the negative impact of Brexit on Britain has to be monitored over years, not in the months right after the vote. These long lags are why research is nearly unanimous in finding that minimum wage hikes increase joblessness, but vary in their assessment of the timing and severity of the impact. Economics, in the words of Sowell, “is incremental. Politics is categorical.” Most economic processes simply don’t provide categorical results that politicians can sum up in brief news-clip soundbites.
The key question is not, as pundits too often put it, “is it ‘fair’ to pay someone x-dollars an hour?” More important are questions such as: Do minimum wage laws help achieve the goal of less poverty — especially if the policy does not even target the poor? (Since most minimum wage workers do not live in low-income households). Does it make sense to impose on businesses the cost of achieving social goals? And, is every laudable social goal affordable? These are the questions we should be debating, if we can ignore those who want us to think minimum wages are a matter of social justice, and not economics.
Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute
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