The Real Goal of a Minimum-Wage Increase

Low-wage workers will gain nothing; trade unions might see a boost.

As President Obama calls on Congress to increase the minimum wage, he needs to remember how employers deal with changing economic circumstances. Recessions increase worker productivity. One reason is simple arithmetic; the other is psychological.

During a recession, workers who had been hired “at the margin” (to facilitate increased production of goods or services in the previous expansion) are let go. There is less demand for the goods and services being produced by firms, so the least productive, or “marginal” workers are released. The workers remaining at the firm are those who are worth more to the firm, meaning that the market value of their output exceeds the cost to the firm of their services. As the recession deepens, only the best or highest-producing employees (per unit of employee cost) are retained. This fact necessarily means that worker productivity (output per worker and output per dollar of labor input) increases.

Productivity increases also result from psychology. Employees fear that their positions will be the next to be cut, so they take fewer sick days, take shorter lunches, take fewer coffee breaks and simply work harder. They want to impress the boss; they do not want to be next on the chopping block.

Increasing worker productivity during recessions is not mere theory. Data throughout the modern era (since WWII) demonstrate the increased productivity during the “bust” portion of each boom- bust cycle. When the unemployment rate doubled between the beginning of the recession in mid-2008 and 2010, labor productivity growth went from negative to nearly six percent. (The data also demonstrate that productivity decreases during the boom, when it’s “all hands on deck,” and skilled workers—and even not so skilled workers—can command a higher wage.)

In his recent State of the Union speech, President Obama urged that the minimum wage be raised from $7.25 to $9 per hour (a 24 percent increase). But as the input cost of a low-skilled or non-skilled worker receiving the minimum wage is increased, the least-productive minimum-wage recipients will be fired.

Employers will act no differently in connection with minimum-wage workers than they do with higher-paid employees. When the firm’s business contracts in a recession—when it is selling fewer widgets—it will move to preserve the balance between input costs and output revenue in order to stay in business. When a government-mandated input increase (in this case a 24 percent increase in the labor cost of one category of worker) occurs, the employer will evaluate the new balance between input costs and output market value—in other words, the “productivity” of each worker. Those not productive enough to command the higher minimum wage will be let go. While progressive think-tankers and elite academia, folks who never have run a competitive business, celebrate an enhancement to “social justice,” those newly separated minimum wage workers will not enjoy the fruits of President Obama’s progressive agenda but instead will have their wages decrease to zero.

Who are the minimum-wage workers in America? The President would have the low-information voter believe that there are millions of deserving full-time workers being exploited for $7.25 per hour while they struggle to feed their families on a weekly income of $267.81 (after the 6.2 percent Social Security tax and the 1.45 percent Medicare tax are deducted from their pay, since they would pay no income tax). But such a worker is a progressive myth.

While it is possible to find some single parents who are minimum-wage workers, such folks are entitled to a vast array of government support payments, including housing vouchers, food stamps, Medicaid and the Earned Income Tax Credit (which provides an income tax “refund” even though the tax filer had no taxable income). No, the vast majority of minimum-wage workers are teenagers. Although some of these teens are high-school dropouts with literally no skills or work ethic, the overwhelming number of minimum-wage teens are middle-class students with part-time jobs in service-sector retail or food establishments. These teens are not feeding their families or struggling to escape poverty. They are working for college money, for gas money or to supplement their household’s income.

So who gets hurt by the minimum wage increase urged by Obama? Exactly those workers he claims to want to help. If a worker is a full-time minimum wage recipient, such a worker is likely to have been a high school dropout with no skills. If an employer took a chance on such a worker at $7.25 per hour, a government-mandated 24 percent increase in pay will not result in that worker’s receipt of more money. Instead, it likely will result in that worker’s separation from employment and the inability to learn a job skill that one day will raise such worker out of the minimum-wage market.

Further, even if a minimum-wage worker is retained after an increase, he will not see an overall increase in his standard of living. Why? Because the earned income tax credit received by such worker will be reduced by the increased pay received.