Minimum Wage Insanity

Let’s start with sanity, some logic.

Theorem: A firm cannot pay workers more than the value that they add to the firm and remain in business.
Corollary 1: Imposing a minimum wage will determine who can get a job and who cannot.
Corollary 2: A minimum wage does not impact the salaries of workers who add more value than the minimum if wages are set in a market environment.
Corollary 3: Eliminating the minimum wage will create employment opportunities for those who add value less than the prevailing minimum and will not result in reductions in wages for workers who add value in excess of the prevailing minimum.

GM is an example of a firm that was compelled to pay more than the value workers added and it failed as predicted a decade ago. Only huge contributions of capital by those stock and bond holders who lost their investment and taxpayers who bailed it out have made today’s GM possible. Whether it can survive on its own is still unknown.

OK, makes sense, workers must “pay their own way” or the firm loses money hiring them. The minimum wage sets this hurdle – a worker must bring at least 2,000 hours x minimum wage to the firm to be employed. The higher the minimum wage, the higher the hurdle the worker must surmount. Thus, setting the minimum wage determines who can get a job and who cannot.

Here’s a recent “real world” example.

In the first half of 2009, the economy shrank at an alarming -4%, part of the worst recession since the Depression. In the first half, teen employment fell by 270,000. This is reasonable, a much weaker economy requires fewer workers to take care of customers.

According to the NBER, the recession ended in June, 2009 and sure enough, the economy grew at a hot 4% rate in the second half. This should have produced an end to teen job loss at a minimum or maybe an increase in jobs. Teen employment fell by 580,000 jobs. Why? Well one BIG reason is that Congress raised the minimum wage in July, 2009 by 10.7%. In a lousy economy, Congress compelled owners to give a huge raise to unskilled workers OR NOT HIRE THEM. Hello!!

Job growth has been very slow in the recovery, and Congress has passed much legislation allegedly to encourage hiring. Yet the White House is now talking about raising the minimum wage to $9. All this will do is relegate more youth to the street corner economy, not just when it happens but forever since the minimum wage sets the hurdle to be beaten every year from the time it is passed. Are these people connected at all to reality? Not exactly “pro-jobs” policy, and it has even worse long term implications as those displaced by the higher minimum will not get the “on the job” training that we all experienced and needed to develop into productive workers.

William Dunkelberg, PhD is an Economics Professor at Temple University and a Commonwealth Foundation Board Member