Baltimore Faces Reality on Minimum Wage

A few weeks ago the mayor of Baltimore said she would veto an increase in the city’s minimum wage to $15 per hour. She said it would put the city at a competitive disadvantage versus the surrounding area.

Hurray for a moment of economic sanity in the “Fight for Fifteen.” The mayor is absolutely correct that a higher minimum wage would drive jobs out of Baltimore.

Minimum wage is popular, but has plenty of problems. Let’s talk about it.

Labor not immune to pricing

Some politicians and union groups refuse to believe that a higher price for workers will discourage hiring. Oddly, some of the same people do believe that higher taxes cause people to buy less cigarettes and soda.

Sorry, labor is not granted a special immunity from pricing reality. If the price of labor is set at an artificially high rate, then demand for labor will be reduced.

Businesses must face economic reality

Social activists seem to think that businesses can pay workers any amount they dream up. Life is not that simple. Businesses must face reality. They cannot afford to pay workers $15 per hour if they provide only $6 of business value. Down that road lies bankruptcy.

Worker pay is not random. Economic logic says that businesses must pay well enough to attract workers (a floor), but they cannot pay workers more than they are worth (a ceiling).

Increases in minimum wage impact more than just businesses. The effects ripple onward. Businesses will typically respond by A) raising prices or B) reducing the cost of their workforce in other ways.

Sometimes the market allows businesses to raise prices. If so, it is only because customers are willing to pay. Of course, that means higher prices for consumers. But customers are not always willing to pay higher prices, so businesses are not always able to pass on higher cost.

Businesses have more control over the cost of their workforce. Employers hit with higher minimum wage might lay off some of their current workforce or avoid expanding their future workforce. They might convert full-time jobs to part-time. They might reduce fringe benefits. The higher that minimum wage is set, the more offsetting reductions businesses will make.

Marginally profitable businesses that are unable to raise prices or completely offset the increased cost will go out of business.

Minimum wage harms low-skilled workers

Fundamentally, different jobs are worth different pay because they create differing amounts of value. It does not really make sense to draw a line at $7.25 or $15.00 and pretend that every job is worth at least that much.

Yes, I’m implying that some workers should be paid less than minimum wage. Some readers may think I am heartless for saying so. I suggest they have it backwards. After all, which people can’t get a job because of minimum wage? Those with the lowest work skills and the least-valuable work contributions. To me, harming the job opportunities of the least-skilled is the true unkindness.

Although a minimum wage job is the lowest and humblest rung on the ladder of economic success, it can be the most important rung. Grabbing that first rung can launch a young (or not so young) person on a trajectory of work ethic and success that benefits their entire life. Artificially placing the first rung out of reach only makes it more difficult for some to reach the higher rungs.

Entry-level jobs can teach low-skilled people valuable life lessons such as how to work and hold a job. It is both an economic and a social tragedy when minimum wage prevents that. The unemployment rate for 16-24 year olds is two to three times worse than for the overall population. Surely the minimum wage plays a role.

Minimum wage not a good way to help poor

The purpose of minimum wage is to help the poor. Ironically, it does not even do a good job of this.

First, understand that most poor people are poor because they don’t have jobs or because they work part-time instead of full-time. i.e., the problem is insufficient work. Increasing minimum wage does not help with that. In fact, it makes things worse by reducing the number of available jobs and work hours.

Next, consider the following facts:

  • Minimum wage jobs represent only 3 percent of all hourly jobs. They are usually entry-level jobs, and most workers move on to higher pay.
  • Three-fourths of minimum wage workers live in households above the poverty line. Many are students and many work part-time. Some provide a secondary income for a well-off household.

Only one out of four minimum wage workers lives in a poor household. Therefore, any minimum wage increase will benefit non-poor households more than poor households!

To recap, most of the harm done by minimum wage hits the most disadvantaged workers, while most of the benefits go to non-poor households. Does this seem like an effective way to help poor people?

At best, minimum wage is a clumsy and ineffective tool for helping the poor. At worst, it provides zero net benefit to the poor.

Right to a living wage?

Some people hold an idealistic notion that anyone who works full-time possesses a ‘right’ to be paid a ‘living wage.’ This notion feeds calls for a higher minimum wage.

A right to a living wage sounds nice, but no such right can exist. This would mean that a worker whose work is valued at only $5 per hour could literally force his employer to pay him $10 or $20 per hour. Which is pretty much saying that workers have the right to steal from their employers!

The right to a living wage implies that every job needs to pay enough to support a family. That is false. Remember, businesses cannot pay workers more than the value they produce. In reality, not every job produces enough value to justify a family-supporting paycheck.

This is OK. Not every worker needs to support a family. Not every job needs to be capable of supporting a family. Anyone that does want to support a family needs to find their way to a job that pays enough. This is just a normal challenge of life.

In closing

Artificially preventing low-skilled people from working is not good for them or for society. We would be better off without any minimum wage.

An individual that wants higher pay needs to find a way to increase the value of their labor. Entry level jobs can help accomplish that, so why allow minimum wage to kill entry level jobs?

If we truly want to address poverty, a better solution is to grow the economy and create jobs. Freedom and competition will do far more for poor people than minimum wage.

Most people don’t even question the idea of minimum wage. But stop and think. Do you seriously believe that government can raise wages simply by passing a decree, without any negative consequences?

Just because government declares that a certain job is worth a certain amount does not make it so. Government edicts cannot halt the laws of economics.


I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.

Advertisements

7 thoughts on “Baltimore Faces Reality on Minimum Wage

  1. Why $15, let’s make everyone rich and raise it to $100. This kind of argument may help people understand why it is futile to try to set the minimum price of labor. Good intentions don’t always lead to good outcomes

    Like

    1. John, I forwarded your blog to my son… At least he read it. Her s his response to me :
      Read that email. Disagree with most of it. Major thing he misses – that minimum wage increase is bad because those jobs will just move outside the city limits, so its bad for the city (and her job) but good for the state.
      Just some feedback…

      Like

      1. Dee, he is partially correct. In reality, the probable result would have been a mixture of A) moving jobs and commerce out of the city to surrounding areas, B) raising prices inside the city, and C) killing overall jobs.

        So yes, some jobs would be transferred outside the city and not eliminated altogether. But doesn’t he care about the inner-city youth and young adults of Baltimore? They will lose jobs when jobs are transferred to the suburbs. And lower-income and immobile residents of the city that have difficulty travelling to the suburbs will be less able to afford going out to eat to the extent that restaurants raise prices (restaurants as one example). And the city will then collect less tax revenue to provide services for city residents. All because of a wage increase that is purely artificial and arbitrary!

        I don’t know if he is a Big Government advocate, but the typical Big Government policy preference is a nation-wide minimum wage of $10 or $15 per hour. If that was enacted, his argument that jobs will ‘only’ move outside the city goes poof. With a nation-wide minimum wage, any jobs that moved would have to move to another country!

        By the way, if we must have minimum wage, that last point is a good argument for setting the rate locally and not nation-wide. Allow competition between states and cities and we’ll see which ideas work the best.

        Like

  2. Thanks, Matt. I agree. Good intentions are commendable, but good results are even better!

    When we factor in actual results, many government actions don’t help the “little guy,” despite good intentions. Minimum wage is one example among many. Ironically, capitalism actually helps the little guy more, but that very real achievement is derided because it is tarnished by profit.

    Anyway, I don’t think this is actually about good intentions. Really, who is against poor people succeeding? Not me. Quite the opposite.

    Like

  3. Well said John. The really sad and ironic part of the minimum wage bill in Baltimore is that it only applies to people over 21yrs old. I think the reasoning of the city council was that if you are over 21, you are more likely to be providing for yourself, or a family, and will need more income.

    So guess what would have happened to you in Baltimore if you turn 21 or are 21 and still have a low skilled job? Employers will have a huge incentive to replace you with a lower cost teenager. The exact opposite result of the city council’s good intentions.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s