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The minimum wage and economic reality

Steve Chapman

February 21, 2013

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President Barack Obama and Democrats in Congress want to raise the minimum wage to improve the lot of the working poor. But they've got the wrong idea. The problem is not that these workers earn so little; it's that the things they buy cost so much. I propose instead to outlaw high prices.

No one, after all, likes paying too much. So let's put a stop to it. Gas is too expensive? Make it $2 a gallon, max. Bread and meat take a big bite out of the family budget? Poor people could eat better if they had to pay only $1 a loaf and $1 a pound.

Clothing, footwear, cars, you name it — if the government held their cost down, life would be more affordable for low-income workers.

In his State of the Union address, the president said, "Tonight, let's declare that in the wealthiest nation on Earth, no one who works full time should have to live in poverty, and raise the federal minimum wage to $9 an hour." He might just as well say that no one should have to spend too much of their income on essentials. So why not limit the cost of those essentials?

Those acquainted with the laws of economics will immediately spot the flaw with my idea. When the price of something falls, demand for it rises, but supply does not. If you tell oil companies what they can charge for gasoline, they will reduce the amount they sell, creating shortages.

Likewise, if you put a price ceiling on bread and milk, or shirts and shoes, consumers will buy more of them, but stores will stock less of them — or, if the price is low enough, none.

We all know we're more likely to go shopping when there's a big sale going on. Retailers don't try to entice customers by announcing price increases. The more expensive something is, the less people will buy.

But those pushing for a higher minimum wage pretend that labor is an exception to the rule. The administration can point to a few economists who claim to show that raising the minimum wage doesn't raise unemployment among low-paid workers. Dean Baker and John Schmitt of the Center for Economic and Policy Research in Washington insist that when employers are forced to pay higher wages, they reap large benefits, in the form of higher productivity and lower turnover.

This is the liberal equivalent of the conservative belief that tax cuts always pay for themselves. Anything so ideologically convenient just has to be true.

But if businesses came out ahead by increasing pay at the bottom, they wouldn't have to be forced into it. They would act on their own, in the relentless pursuit of profits. Instead, many employers have calculated — based on real-world experience meeting payrolls and competing with rivals — that higher pay for entry-level workers is not a free lunch.

Raising the minimum wage may indeed raise average worker productivity — not by inducing existing workers to work harder or smarter, but by inducing companies to get rid of less productive workers. If you raise the floor from $7.25 an hour to $9, employees whose work output is less than $9 an hour will be let go.

Saying that a higher minimum wage would increase productivity is like saying that banning anyone under 6-foot-10 will make NBA players taller. It will, but not because anyone will grow.

Even the famously liberal Nobel laureate economist Paul Krugman has pointed out these realities. On the blog EconLog, economist David Henderson of Stanford's Hoover Institution cites a 1998 article in which Krugman ridiculed those who "very much want to believe that the price of labor — unlike that of gasoline, or Manhattan apartments — can be set based on considerations of justice, not supply and demand, without unpleasant side effects."

Obama argues for an increase by saying no one who works full time should remain poor. One fact he doesn't mention is that the great majority of people who earn the minimum wage are not poor. More often, they're middle-class teenagers.

Another likelihood, which he denies, is that while some workers will go from $7.25 an hour to $9 an hour, others will go from $7.25 an hour to zero. They won't be poor despite working full time. They'll be poor because they're unemployed.

Maybe this won't happen because the laws of supply and demand will be suspended. But would you want to bet your job on it?

Steve Chapman is a member of the Tribune's editorial board and blogs at chicagotribune.com/chapman.

schapman@tribune.com

Twitter @SteveChapman13