Raising minimum wage makes minimum sense

Senator Bert Johnson of Detroit recently introduced a bill, S.B. 1177, that would increase Michigan’s minimum wage from the current $7.40 per hour to $10 per hour by January 1, 2015 and then index the minimum wage to inflation. On his web site, the senator asserts that “a better minimum wage improves standards of living; stimulates consumption, and therefore job creation; and decreases the need for governmental assistance.”

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This bill is a case of good intentions resulting in unintended consequences that make the people it intends to help worse off. Ludwig von Mises pointed out in his 1927 book, “Liberalism in the Classical Tradition,” that “there is only one thing that can raise wages: A rise in the general productivity of labor, whether by virtue of an increase in the capital available or through an improvement in the technological process of production.”

How can the owner of a business pay people more than the value of what they produce? Suppose that by hiring you at my car wash, I can make $7 more per hour. Is it reasonable to think that I can pay you $10 per hour? Over time I would be losing $3 per hour and I will eventually be driven out of business.

What Mises was saying was that if I can increase your productivity so you add $10 per hour worth of value, then I can pay you $10 per hour. So the key to increased wages is increased productivity. Now, how can I increase your productivity?

One way is to increase the amount of what economists call capital that workers have. Capital consists of things which are used to produce other goods and services, such as computers, servers, drill presses, factory buildings, etc. A worker that has more capital will be more productive and be paid more. That is why wages have risen in Japan since the time when I was a kid and “made in Japan” meant cheap products made with cheap labor. Capital moved to Japan, increasing the productivity and thus wages of labor. We are witnessing the same thing in China today.

Another type of capital is human capital—education and training. One of the reasons there is a substantial gap in lifetime earnings of those with a college education and those who did not graduate from high school is because the college graduate is capable of producing more value. Thus, if we want to increase the wages of the poor, we must increase their human capital—improving their education and job skills.

As Mises also noted, changes in technology of production will improve the productivity of labor. Nurses, secretaries, engineers, auto mechanics—nearly every skilled profession has gained from the changes in technology that have taken place over the last few decades, and as a consequence they are more highly paid than before.

If the government attempts to mandate a wage, it must result in unemployment. The only question, is how much unemployment there will be? And who will be the people who become unemployed? Increasing the minimum wage cannot make any workers more productive. So when the minimum wage gets to $10 per hour, then all those workers who today are employed and producing between $7.40 per hour and $10 per hour will no longer be able to find work.

In effect, the minimum wage makes it against the law for anyone who cannot produce the amount of profit per hour specified in the minimum wage to be employed. This makes no sense from an economic point of view, but it also makes no sense from the point of view of individual liberty. If I wish to work for you for $7 per hour and you are willing to pay me $7 per hour for my labor, why should the government keep us from accomplishing what we both desire?

The bad part about the minimum wage is that the people who lose the most are those who are at the bottom of the socio-economic ladder. I will not lose my job even when the minimum wage gets to $10 per hour. But what about the black teenager who is a high school dropout and managed to get a job at $7.40 per hour? It is not clear that he will still have that job at $10 per hour. The minimum wage is one reason black teenage unemployment in this country is 36.5 percent.

Rather than making it against the law to employ anyone who cannot produce $10 an hour, we should direct our efforts to increasing the productivity of our work force by improving the quality of our education system and improving the incentives for adding to the stock of capital in Michigan.

(Dr. Gary L. Wolfram is the William E. Simon Professor in Economics and Public Policy at Hillsdale College. Originally posted on The Michigan View.)

Comments

  1. Wild Bill says

    Be aware this is nothing more than a “Re-election” tactic. Who can afford to do this with the economy in it’s current state.

  2. The ignorant leadership in our state and our country really don’t have a clue how to get things going and raising the min wage is one of the most stupid things that can be done. It only helps the 16-18 year old in high school not the person trying to provide for their family it just screws them.

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