Cynicism on Minimum Wages Hikes

The Wages of Cynicism

Raising the minimum wage won’t stimulate the economy, but it will stimulate Democratic interest groups.

City Journal   January 21, 2021

Joe Biden’s recent speech—given when he was still President-elect Biden—on stimulating the economy included, among other proposals, one long on the Democratic wish list: raising the federal minimum wage to $15 an hour.

Would this policy stimulate the economy? According to the Congressional Budget Office, it would increase the income of about 7 million employees at the low end of the wage scale, at least at first. But it would also immediately cost 1.3 million other low-end employees their jobs.

The reasons for this are well understood. Prices in a free market are set by supply and demand. A commodity’s price is where supply and demand stand in equilibrium. The medieval fantasy of a “just price”—which a mandated minimum wage implies—is just that, a fantasy. If government sets a price above the free-market price—such as a minimum wage—supply will increase, but demand will drop. Employers will seek other ways of meeting their needs, such as automation, a burgeoning field in the digital age.

Many checkout lines in large supermarkets are already unmanned, for instance, and customers check themselves out via a computer. Double the federal minimum wage, as President Biden proposes, and all but a very few checkout lines will be automated within a few years. Human beings still perform shelf-stocking, another minimum-wage job, but the task is hardly beyond the capacity of modern-day robots.

Only about 2.3 percent of employed Americans earn the minimum wage. The industry with the highest number of such workers is leisure and hospitality, where many workers also earn tips, which constitute a substantial part of their income.

The usual argument for the $15 minimum is that an individual, still less a family, cannot live on the current minimum wage. That’s perfectly true: working 40 hours a week at $7.25 an hour would pay only $290 a week, or $15,080 a year, before Social Security and other payroll deductions. But very few minimum-wage earners are heads of households, and only about 1 percent of them are married. Half are under 25. Indeed, the typical minimum-wage worker is a high school student earning money after classes, or a retired person who doesn’t want to sit home all day. At the end of his or her shift, the average minimum-wage earner goes home to a family that earns income at or near the country’s median: $68,000 a year in 2019.

For the few families dependent on a single wage-earner making the minimum wage, multiple assistance programs—food stamps, Medicaid, Section 8 housing, and the earned-income tax credit—are available that together would raise the household’s income well above the poverty line.

So if a doubled minimum wage would help only a few people who need it, at the cost of significantly depressing employment at the low end of the wage scale, why are the Democrats so gung-ho in favor if it?

Well, first, as the parties’ bases have shifted over the last 70 years, so have their politics. The Democrats were once the party of the ordinary guy. Their traditional allies, labor unions, in the early 1950s represented about one-third of all private-sector workers. The Republicans were the party of the country club.

This is no longer true. Unions now represent only 6 percent of private-sector workers but one-third of government workers. Today, the Democrats easily carry the coastal elites and the higher echelons of big business, but they also carry those needing government assistance, government workers, public school teachers, and most academics (who often need grants).

Republicans, in contrast, are now the party of the upwardly mobile, small businessmen, entrepreneurs, and, interestingly, many members of big labor, dubbed Reagan Democrats a generation ago. In other words, today the Democrats are the party of government, and the Republicans are the party of the free market. Raising the mandatory pay of jobs on the first rung of the socioeconomic ladder makes it much harder for people to get on that first rung and start climbing. Democrats would never admit it, but that suits them. The upwardly mobile, after all, increasingly vote Republican.

Second, labor unions—the top source of funds for the Democratic Party and its candidates—are always in the forefront of the drive for a higher minimum wage. Very few union members earn minimum wage, though, so why do unions support raising it? Simple: because wages in labor contracts are often set as multiples of that wage. Get Congress to raise the minimum wage, and many well-paid labor union members get a raise too, without having to bargain for it.

Sound cynical? In politics, it’s difficult to be too cynical.

John Steele Gordon specializes in business and financial history and is the author of books including Hamilton’s Blessing: The Extraordinary Life and Times of Our National Debt.