March 13, 2005

Raise the minimum IQ, while you’re at it

By: David Freddoso

Another year, another attempt to raise the federal minimum wage. Back in late 2003, San Franciscans voted in a referendum to make low-skilled labor cost $8.50 per hour — far too expensive for most employers. They can be excused for their ignorance of basic economics, but what about the 46 members of the U.S. Senate who just voted last week for a similar measure?

The minimum wage is such an easy issue to demagogue that it is surprising this new wage increase proposal — from $5.15 to $7.25 — failed as it did by a 46-49 vote. Part of the reason for its failure was a successful parliamentary strategy by Senate Republicans, but one can also at least hope more legislators and voters are learning about the problems with government wage controls.

Press accounts invariably characterize artificial wage-controls as “giving low-wage workers a raise” or “increasing their purchasing power.” In fact, minimum wage hikes will give many workers a pink slip, and in some cases result in the loss of their jobs to illegal aliens who work at sub-minimum wages. But even more importantly, to the extent that any workers get a raise from a minimum wage hike, that raise is inflationary: it will be eroded by higher prices that result from artificial wage increases not accompanied by economic growth.

The Natural Minimum

The laws of economics do set a natural minimum wage — the wage at which a worker decides this job just isn’t worth his time. There is also a minimum that an employer must pay if he wants to keep his workers for more than a few months (or years), and another minimum if he wishes to hire anyone with skills. But no fixed number can be set on any of these minima — they vary by region, by skills, by individual expectations, and by workers’ needs and family situations. Effectively, every individual has his own minimum wage.

For all but the 2.7 percent of American workers who earn $5.15 per hour — the artificial minimum wage set by law — the natural minimum is already higher than the legal requirement. Some could and would work for less, particularly teenagers. What sense is there in a federal law that requires employers to pay teenagers the same amount as fathers of families, or that requires a storekeeper in the Ozarks to pay the same wage as an employer on Manhattan’s Upper East Side?

Sen. Mike Enzi of Wyoming, certainly one of the lesser-known senators in Washington, gave a terrific speech on the Senate floor explaining the inflationary problem of minimum wage policy is: “Wages do not cause sales,” he said. “Sales are needed to provide wages. Wages do not cause revenue. Revenue drives wages . . . Wage increases without increased sales or higher productivity have to be paid for by higher prices. Higher prices wipe out wage increases.”

He went on: “By requiring employers to pay a higher wage for positions they consider entry-level, [the minimum wage] forces employers to search for higher skilled employees. Moreover, mandated higher entry-level wages force employers to redefine the nature of the job and the expectations they have for their entry-level workers. Unskilled and low-skilled workers without the new qualifications will, therefore, be the first to be displaced and the last to be employed.”

Enzi finally noted that only 15 percent of minimum wage earners are the sole breadwinners for families: “Forty percent live with a parent or relative. Twenty-one percent live with another wage earner. Twenty-four percent are single or are the sole breadwinner in a household with no children.”

The Managed Economy

The soft-spoken Enzi’s brief but effective defense of economic sanity received little attention, especially in juxtaposition with Ted Kennedy’s thunderous, booming speeches condemning America’s lack of compassion for refusing to outlaw low-wage work. But Enzi’s words only confirm what we already know about “managed economies.” We have seen them tried, and they always fail.

Several European governments decided last century that economic reality does not apply to them. They viewed businesses as cash cows to be squeezed and bullied with wage controls and labor regulations, if not outright confiscation of assets. Of course, it didn’t help matters at all. Those nations now lag behind us — 20 years behind us, according to a study released last week by a group representing Eurozone small businesses.

In France, a state-imposed 35-hour work week was supposed to bludgeon businesses into employing more people to do less work at the same wages. French unemployment for February was at 10% and climbing. Meanwhile, Germany was enjoying 12.6 percent unemployment last month, more than twice our rate, and the Eurozone average was 8.9 percent. Any of those numbers would cause civil unrest if we had them here, which begs the question of why so many do-gooders want us to operate more like they do.

David Freddoso, a native of Indiana, is a political reporter for Evans and Novak Inside Report.