A guest opinion in a recent issue of The Idaho Statesman suggests that minimum wage laws are an anathema to a free market society, destined to result in economic ruin for us all. The article is a recitation of hard right theology dressed up to look like sound economic theory, but is really unadulterated poppycock.
First dose of balderdash is the claim that the higher the price of labor, the lower the demand for it will be. This phony theorem is advanced to support the argument that increasing the guaranteed minimum wage will cause a correlative decrease in employment. The contention is, in a word, nonsense. It comes from substituting labels and torturing the basic supply and demand curve, which does hold that where supply is fixed, the higher the price of goods, the lower the demand. However, when measuring the cost of labor, the supply and demand curve usually has no application.
Generally, the cost of labor is a made up of a combination of elements, starting with the fluidity of the labor pool combined with functions of scarcity and specialty, and overlaid with the options open to the individual worker. This means that where there are few laborers available to accomplish the tasks demanded, the cost goes up. This was demonstrated in the shale oil fields of the Midwest where pay rates skyrocketed when the fields were first opened with (relatively) few laborers in the area. As workers flocked to the oil fields, and as the pool of available workers grew, the pay rates normalized somewhat. Then, as the price of crude plummeted, and as some owners began taking shale wells off production, the demand for labor dropped precipitously. Unemployment arrived in some areas, and pay rates plummeted further. The point to take away here is that demand drives the cost of labor – not the other way around.
On the other hand, in established markets at the bottom of our economy, where the greatest sea of the unemployed are to be found – the supply of unskilled labor is plentiful and demand is not an element. Fluidity, scarcity and specialty are not involved. The job seekers at the bottom are seldom able to move to follow or seek out new opportunities. They do not possess qualifications or skills which would narrow the supply. The price of labor here gravitates to minimum levels established by tolerance among employers, not to levels arrived at by negotiations with employees. The owner needs a certain level of labor – to get his field harvested, for example, or to get his takeout joint staffed with hamburger flippers – which he can fill by simply paying whatever the “going rate” is. He need not pay more, for the supply of unskilled labor is ample, and if he offers to pay less, the worker can find equivalent work for the “going rate” elsewhere in the same area. At the bottom of the pile, the cost of labor is a limiting factor, not a deciding factor.
In the world we live in, and in the general case, the labor pool is more fixed than fluid and cannot react. One form of strengthening the position of a relatively fixed labor pool is organization – labor unions insert the element of scarcity into the formula and change the balance of power. Strong labor unions are probably the most significant factor in creating a middle class in the industrialized middle of our economy. In many states, right-to-work laws have been enacted limiting the effectiveness of unions to organize. In these states, the wage rates are usually considerably lower than in states with strong unions.
Without the ability of labor to relocate freely, or to organize into effective unions, and absent some form of regulation, the bottom wage could theoretically decline to a penny. If that became the going rate, the owner would be under no motivation to pay more. Overall scarcity will affect the labor pool, but not the individual worker’s need or desire for higher pay. In a scarce market, the worker would never be called upon to work for a penny because the guy across the street will pay a dime, or more, and so forth, until an equilibrium with the level of scarcity is reached.
In the world market, this allows owners to move production from the United States to other areas of the world, where the going rates for labor are indexed much lower than here. It has also resulted in owners relocating production facilities within the United States – away from the traditional industrial states with strong, well organized unions, for example, into states with right to work laws that favor management and offer opportunity to obtain labor at lesser rates.
But in the true unskilled, unqualified bottom rungs of our economy, there has to be regulation to avoid abuse and exploitation. Even Adam Smith recognized that the greed inherent to a true free market would require regulation for the protection of the masses. We have never had a true free market economy, and would not tolerate it if we ever did.
The second dose of blarney claimed by the far right is that imposition of a higher minimum wage will have a disastrous impact on employment. The notion that raising the minimum wage to a reasoned level would have any measurable impact upon employment in the economy is a blatant, pants-on-fire, bald faced, whopper. In all of the history of the federally mandated minimum wage, being since the Fair Labor Standards Act of 1938, or 78 years, there is no instance where the reasoned addition, imposition or increase of a minimum wage has had any measurable net effect on the overall economy generally, or upon net levels employment within the economy specifically.
In a landmark study in 1994, two economists compared the effect on employment in the restaurant industry following a 1992 modest increase in the New Jersey minimum wage. They concluded that the rise in the minimum wage had no impact upon employment. More recently, a 2013 Center for Economic and Policy Research (CEPR) review of multiple studies over a 10 to 12 year period since 2000 indicated that there was little or no employment response to the increases in the minimum wage that had occurred.
In a more specific study in 2014, the Congressional Budget Office (CBO) estimated that if the minimum wage was raised from $7.25 to $10.10 per hour, being an increase approximately to the poverty line, this might lead to a reduction of 500,000 entry-level jobs, for an impact on GNP of around $3.5 million. But the trade-off would be a substantial increase the income of over 16.5 million workers who were paid at or less than the bottom wage rate. If one assumes that the increase would directly increase consumer spending, the result would be an increase in GNP of something in the range of $48 million -- which would offset negative impact many times over.
Another CEPR study in 2014 found that job creation within the United States is faster within states that raised their minimum wage. The study observed that in 2014, the area with the highest minimum wage in the nation, Washington D.C., exceeded the national average for job growth in the United States.
The final dose of hogwash delivered from the teapot right is the contention that any increase in the minimum wage will be passed on directly to the consumer through increased prices. The hyperbole is that the lower cost family cafes will disappear into mechanized do-it-yourself places with only the upper crust establishments surviving. While increasing labor costs do put pressure on management, there is no certainty that the increased costs will necessarily result in increased prices. The high rates of profitability being experienced by the upper levels under present conditions would indicate that margins are more than sufficient to absorb some level of additional cost before price is necessarily affected.
Price is a function of demand, not cost – and if demand will not support an increased price, management will have to accommodate the effect of increased labor costs somewhere else. Better management practices is always a possibility, as is accepting lower profit margins. While marginal operations may fail, the blame is far more likely to be upon management practices than upon any modest rise of the minimum wage floor.
The other side of the whole argument is that the far right objection and continued blockage of any increase in the minimum wage regulation is a contributor to the stagnation the middle class that has sustained in our economy for close to 30 years. At present minimum wage level, the bottom levels of income are below the levels of poverty. This has resulted in welfare supplements like food stamps, Medicaid and direct aid to the working poor. This allows the upper levels of management and owners to enjoy a heightened profit margin at the expense of the taxpayer, which one would expect the right wing to violently oppose.
Our economy continues to grow at a steady clip; the higher brackets of individual earnings, at the entrepreneurial management and owner levels, have seen record increases. However, the middle classes and below have been flat-lined for the years. The result is a growing disparity between those upper range income levels and the levels of the middle class and below.
Most commentators of political science, economics, history and sociology who have been studying this phenomena believe it imperative that the growing income imbalance be aggressively addressed. A strong adjustment to the federally guaranteed minimum wage would be a key ingredient and a good beginning.