Friday, December 13, 2013

We shouldn't raise the Minimum Wage

Also posted at The Huffington Post.

Living on the minimum wage is anything but easy. In flowing vein, a raised minimum wage seems so logical, so morally clear; a small measure of support for those who need it most. A benefit without hard cost. The polls reflect this understanding – a ‘raise’ seems to be the perfect servant of social mobility. Moreover, most Americans agree that social mobility isn’t just a political ideal, but a national imperative.

‘Seems’ is the unfortunate but operative word here. Ultimately, raising the minimum wage isn’t an opening to a fairer, more prosperous America. It’s an obstacle.

For start, while wage-raise supporters claim that a raise would avoid negative employment aftershocks, the economic data suggests otherwise. To support their case, the pro-raise movement often points to a study by David Card and Alan Krueger (a former Chairman of Obama’s Council of Economic Advisers) which claimed that when compared to a Pennsylvania control group, New Jersey’s 1992 minimum wage increase did not reduce employment in the fast food industry.

Not so fast.

In fact, in a 1995 study that relied upon payroll data (rather than the telephone surveys of the Card/Krueger study), David Neumark and William Wascher found that New Jersey’s actions lead to a 4.6% decrease in employment against the Pennsylvania data set. Other economists have also made convincing arguments that Card and Krueger’s collection methodology was both functionally flawed and poorly focused.

These alternate studies speak to a broader base of understanding. As Harvard’s Greg Mankiw points out, there’s strong evidence to suggest that raising the minimum wage has a particularly pernicious impact on the employment prospects of younger Americans. Gary Becker and Richard Posner make a similarly compelling case when they posit that minimum wage hikes serve as a form of income segregation for the poorest in our society.

For me, the economic-morality argument is actually pretty clear.

While it might well be true that a minimum wage hike will cause small correlative price rises, these rises will nevertheless force socially negative monetary transfers. At the defining level, the ‘raise’ argument assumes that by transferring income from a higher income consumer to a lower income employee, savings are transferred to those with a higher marginal propensity to consume (MPC). Correspondingly, ‘raise’ supporters claim that the economy will benefit from the multiplier effect born of increased consumer activity. Yet for society’s long term interests, this is by no means a good thing. If one accepts that investment is the key to a nation's long term economic productivity, by reducing savings we will see an associated reduction in long term productivity. At a national level, the cents quickly add up. Or in this case, disappear.

A minimum wage increase would also carry a basic, unambiguous challenge at the personal level. For many patrons of McDonalds, for example, marginal cost is hardly a minor consideration.

Don’t get me wrong, I’m not saying we shouldn’t energize social mobility; we must. And with urgency. It’s just that there are far better alternatives than increasing the minimum wage. Here are some other options. First, we need to ensure that greater in-house training/promotion opportunities are offered to those who work in low wage positions. We also need greater funding for government sponsored skills programs – especially those that operate at irregular hours (so that service industry workers can attend outside of their work schedule). Most importantly, we need an education system suited to the 21st century - good schools cannot be the right of wealthy counties. Conservatives also need to realize that inner city politics demand our attention. Subsuming all of this; as a country, we need to get over the idea that massive welfare programs help those trapped in poverty. In actuality, they restrain economic mobility and penalize personal responsibility.

In the end however, real reform will have to start at the top. If the President is serious about increasing the number of well-paying jobs, why won’t he lift the lid on an American energy boom? If the President is serious about investment, why doesn’t he find savings in serious entitlement reform? If the President is serious regarding social mobility, why does he revel in wealth transfers from the youngest Americans to the oldest?

As someone who worked in a restaurant for a number of years, I know firsthand that cost-control is an intrinsic component of effective business management. Businesses cannot allocate resources in the moment; they must do so with a view to durable profitability over the long term. In the same way, by forcing businesses to put a premium on an individual from the instant of their employment application, a minimum wage raise will do most harm to those at the bottom of the skills pool. In many cases, it will simply price these individuals out of the workplace. By denying applicants a step on the first rung of the employment ladder, they’ll be unable to show their hidden potential.

Forgive me, but that’s a strange form of social justice and an uncomfortable partner to the American dream.

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