Monday, October 17, 2005

Minimum Wage & Substitutes

Al Eisenberg believes that “Virginia's poorest workers need a raise.” Eisenberg, a Democrat representing Arlington in the Virginia House of Delegates, believes it is his job to make employers pay them a higher hourly wage.

Citing economists from Princeton and MIT, he states that an increase in the minimum wage will have “little or no effect on employment” and will not cost jobs. First, he needs to make up his mind: will the laws have little effect or will they have no effect on employment? Certainly if the increase is small enough, the effect will be small as well. But the effect is still there. This is why no one calls for making the minimum wage $50/hour. Suppose we did make the minimum wage $50/hour. Many attorneys, doctors, and actors would still be employed, but how many teenagers would be able to obtain a job at a nearby store? How many people who have not had the benefit of higher education would remain employed? If we make the assumption, as Eisenberg and others do, that the increase will have no effect on employment, how much do you expect to pay for your groceries when the cashiers are all earning $50/hour?

By removing the freedom to determine wages through voluntary exchange and negotiation, you are removing all bargaining power that the less desirable workers have.

It is an inescapable reality that we live in a world of scarcity and therefore look for the least cost method of obtaining the things we want. When one method of acquiring our wants becomes more expensive, we seek alternative, cheaper methods. No amount of legislation or minimum wage increases can change this fact.

When I was younger, there were no self-checkout lines at the grocery store. You didn’t scan your own credit card or bag your own groceries. Most offices had receptionists instead of recorded messages. All of these automations are substitutes for human labor. Increasing the cost of labor will only increase the profitability of substitutes. Eisenberg and the economists he references forget that elasticity changes over time. While we might not see an immediate response (manifesting itself in the decrease in quantity of labor demanded), we will see the response over time as companies develop cheaper ways of conducting business. If Al Eisenberg thinks he is helping the poorest workers in the long run, he is sorely mistaken.

Automation is not the only substitute for cheap labor. Skilled labor is another. Unions, even though their members earn well above the minimum wage, consistently support minimum wage laws. Why? Because unions care about all workers equally? No! Raising the minimum wage is purely a way to price their competition, i.e. the less skilled workers, out of a job. If minimum wage laws truly had “little or no effect” on employment, why do unions continue to spend resources supporting them?

Quoting the Economic Policy Institute, Al Eisenberg also states that, “if Virginians earning the minimum wage got an increase, not just the workers but also businesses, the economy and the society in general would benefit.” This statement alone should cast some light on the fallacy of his argument. If raising the minimum wage is clearly good for everyone, and good for “society in general,” why do we need a law that forces businesses to adopt a higher wage?

* Hat tip to Tim at the Arlington County Taxpayers' Association
** My apologies for the lack of posting over the past few days. I was not well for the last few days and appreciate the notes of concern.

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