The High Minimum Wage Blues

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Commentary

If all goes as supporters intend, a measure to raise the minimum wage in the nation’s capital to $25 per hour by 2029 will appear on city ballots in November. It’s not an isolated occurrence. From New York City to Honolulu, proposals for a spike in the minimum wage have become ubiquitous among progressives.

Saru Jayaraman, the president of One Fair Wage, cited as justification the affordability crisis.

“We’re going to ... demand what we really need,” she told The Washington Post, “which is a living wage, a minimum wage that meets the cost of living.”

Simplistic though it is, I’m sympathetic to the reasoning. As a freelance writer, I’m far from a member of “The 1 percent” myself. Meanwhile, some celebrities, athletes, and executives rake in more than $50,000 per hour.

Money isn’t everything, but it is something. And this gap between wealth and poverty, or in my case modesty, has diverged for decades. Technology has created an environment for extreme outperformers in a variety of fields to leverage success in ways that did not exist before. Even so, both my life experience and my economics education ring alarm bells in my head whenever I hear plans to raise the minimum wage.

In 2018, a health crisis prevented me from working for much of the year. I had to slowly ease myself back into work mode. This included a part-time job at a department store. I monitored security cameras from a room while communicating with a security team and store employees about theft or suspicious activity.

I intended to stay a few months but remained almost three years. The job had a big fringe benefit. Most of the time, it required only my eyes. My mind was free to plan writing projects, listen to podcasts, or practice Spanish, all while earning some $13.50 per hour to start. If a proposal for a $25 per hour minimum wage had come up at the time, I would have been a hard no, viewing it as a threat to my position.

Running a business is a kaleidoscope of financial decisions and trade-offs. The goal of owners is to earn a profit, which is their wage. They do it by hiring workers who contribute more to the bottom line than they extract in cost. In practical terms, it means that I was hired to watch cameras because my doing so held the promise of more than $13.50 per hour added to the store’s bottom line (principally through theft prevention).

Economists call this the value of the marginal product of labor (VMPL). Sitting in the camera room, I sometimes wondered how my VMPL compared with my earnings. It was impossible to say. But if the chain had not thought camera monitors were worth their hire, they could have left the room empty and had managers come in as needed to monitor activity or download footage for police. Many stores operate this way.

Would my position have survived a $25 per hour minimum wage? I highly doubt it. Barring an increase in the price of the store’s merchandise, which might have driven off customers, I don’t think the VMPL of screen watching could have justified that figure.

But surely this was a quirk of the position, one might argue. A store can do without screen watchers. But other low-wage jobs, such as cleaning staff, are mission-critical. A store must have them in order to exist.

This is true, but only narrowly. A store doesn’t have to exist. As part of the free market, if labor costs rise, it may downsize or go out of business, outcompeted by online retailers or by brick-and-mortar stores that substitute labor-saving technology such as robotic floor cleaners.

Progressives imagine that such businesses are too miserly to pay workers what they ought to. The more common reality is that businesses are trying to operate efficiently in an environment in which they must compete for both workers and customers. Some low-level positions simply don’t justify high wages. Yet there are many reasons someone might want such a job. In my case, it was health-related. In others, someone might be looking to gain a foothold in the workforce from which to climb higher.

At the same time, there remain policy options for addressing a diverging income gap, ones that leverage rather than distort the proven strength of free markets.

In the long run, our education system should do a better job teaching young people how the capitalist economy works and about the life possibilities it offers them through activities such as entrepreneurship.

In the short run, expanded wage subsidies are a better alternative than a minimum wage. They allow low-level workers to earn more without endangering anyone’s employability. Subsidies can be paid directly to workers through a program such as the Earned Income Tax Credit, or to employers through hiring credits. Coining the term “negative income tax,” no less a free-market partisan than Milton Friedman advocated for these as a means of alleviating poverty.

So why all the focus on the minimum wage, when clearly superior tools exist? One reason is that it’s a cheap and simplistic virtue signal. Politically, the minimum wage sells. But like much of life, its simplicity is deceptive. Beneath the surface is a tangle of hidden costs and cascading consequences, often borne by the people least expected, even those it proposes to help.

From the American Institute for Economic Research