Minimum Wage, Maximum Stupidity
By Doug French, Contributing Editor
The minimum wage debate often seems straightforward for those familiar with economic principles. When the government arbitrarily imposes a wage floor above what the market dictates, it inevitably leads to job losses. The Congressional Budget Office has acknowledged a potential loss of 500,000 jobs if the federal minimum wage is raised to $10.10. It’s uncertain how many additional jobs could be affected.
Despite the dire employment situation, discussions around raising the minimum wage have resurfaced as unemployment remains a significant issue. Currently, around 3.37 million Americans have been jobless for 27 weeks or longer. While this number is a decrease from the 6.8 million long-term unemployed in 2010, it reflects a troubling trend, as many have simply given up on finding work.
Sound economic reasoning would suggest that employment should be made more affordable. Lower prices typically boost demand, implying that reducing the minimum wage along with easing restrictive employment regulations could stimulate the job market.
However, as H.L. Mencken famously noted, “Nobody ever went broke underestimating the intelligence of the American public.” This underestimation allows the flawed arguments of wealthy individuals like Republican businessman Ron Unz to gain traction.
We Don’t Want No Stinkin’ Entry-Level Jobs
Unz proposes a minimum wage of $12 and concedes that most resistance stems from concerns over job loss. His counterpoint? America allegedly does not prioritize low-paying jobs. He argues, “Critics of raising the minimum wage highlight job losses, and they may be correct. However, many of those jobs shouldn’t exist in an affluent society like the United States, which should avoid competing with low-wage sectors in countries such as Mexico or India.”
Unz dismisses fast-food positions but acknowledges the reality that these jobs can’t be outsourced. His solution? If all businesses are required to raise wages simultaneously, the resulting costs can be absorbed through modest price increases. Working-class individuals would see an increase in income, allowing them to afford slightly higher prices for items like McDonald’s hamburgers, which he believes would barely impact the more affluent consumers.
The Number of Jobs Isn’t Fixed
Unz asserts that if all jobs paid adequately, there would be ample applicants. This viewpoint clashes with that of David Brat, the economics professor who recently defeated House Majority Leader Eric Cantor. Brat identifies open borders as both a national security and economic threat, suggesting that an influx of workers will depress wages and result in job losses.
This perspective assumes a static pool of jobs, which is fundamentally flawed. Economic theory supports that human needs are unlimited, whereas resources are limited, leading to a constant demand for labor—limited only by the economy’s productive capacity. Nicholas Freiling explains in The Freeman that as labor supply rises, economic growth consequently accelerates.
While an influx of illegal immigrants may potentially lower wages, this can encourage businesses to invest in productivity. Lower labor costs can enhance operational efficiency, benefitting both producers and consumers, and ultimately contributing to job creation through capital investment.
Employers Bid for Labor Like Anything Else
Unz suggests that low-wage employers are improperly benefiting from the welfare state, writing, “This is a case where businesses manage to privatize the benefits of their workforce while socializing the costs. They shift expenses onto taxpayers and the government.”
This critique raises questions about how he accumulated his wealth in the first place. Wage rates are not determined by employee expenses. Economist Ludwig von Mises articulated that labor is a limited resource sold in the market, with wage rates being influenced by the demands for the product or service that labor helps produce.
As Mises noted, there’s no universal wage rate; labor varies significantly in quality, and each form of labor provides unique value in producing goods and services. Not all jobs yield sufficient output to warrant a $12 wage, which is why the Fair Labor Standards Act of 1938 included exemptions for certain employee categories, recognizing the disparities in productive capacity.
Entrepreneurs must procure every element of production at minimal costs to meet consumer demands. Wage reductions ultimately affect pricing, as businesses paying above the market rate risk jeopardizing their operations. Pay below the market, and employees will inevitably seek better opportunities elsewhere.
Who Picks Up The Tab?
Unz asserts that American businesses can easily afford to increase wages, given that corporate profits have soared while wages have declined in their share of national GDP. He proposes that businesses, rather than taxpayers, should support the poor. Later, however, he suggests consumers will shoulder this responsibility through price hikes.
“Fast-food chains like McDonald’s may need to raise prices by 8 to 9 percent. Groceries for American-grown agricultural products would see only a slight increase of under 2 percent—all of which would likely go unnoticed by consumers,” he claims. Walmart may cover the cost of a $12 minimum wage by increasing prices by just 1.1 percent, adding only $12.50 to the annual budget for the average shopper. Thus, it appears that consumers, who are also taxpayers, ultimately become responsible for this transition.
Fortune magazine’s Stephen Gandel argued on Morning Joe that Walmart should grant its employees a 50 percent wage increase, claiming the company misallocates capital by not compensating its workers adequately. He believes that higher wages would enhance the stock price and benefit the company overall.
However, Walmart does adjust wages in response to competitive pressures. For instance, in Williston, North Dakota, they are offering entry-level positions at $17.40 per hour to attract staff. Other companies, like McDonald’s, have reported using signing bonuses of $300 to pull in new workers.
Walmart’s hiring practices indicate that they’re paying competitively; their locations often receive throngs of applications. For example, in 2005, 11,000 people applied for 400 openings at a new store in Oakland, and in a subsequent year, 25,000 applications flooded in for just 325 positions at another store near Chicago.
A recent Walmart opening in the DC area also drew significant interest. One prospective employee remarked, “It’s challenging to survive on $7.45 or $8.25 an hour here. I’ve lived in the city my whole life and want to stay. I’m just glad Walmart is here; I might get a job.”
Historically, individuals have relocated to seek employment—and this remains true today.
Over time, as the minimum wage rises, investments in capital will likely replace manual labor. This trend has been evident, as machines do not take sick leave, do not sue for harassment, and perform tasks efficiently. Self-service technology has already been introduced in sectors from dining to grocery shopping, and automation is set to increase further.
Unz may earnestly believe that his proposals are beneficial; however, the reality is that such measures may leave unskilled workers and young people without job opportunities in the future.
Sincerely,
Doug French
for Economic Prism
[Editor’s Note: This excerpt comes from the Daily Dispatch, Casey Research’s popular e-letter. Stay informed on major trends regarding precious metals, energy, technology, and more. Sign up here to receive the Daily Dispatch free in your inbox. The article Minimum Wage, Maximum Stupidity was originally published at caseyresearch.com.]
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