One theme that appears frequently on this site is the notion that policies have consequences and what distinguishes serious thinkers from less serious ones is that the serious thinkers consider the implications of the policies they choose to pursue. The “living wage” is an example of just such a thing — those who tend to champion that policy tend not to consider how such a thing works in the real world. For instance, take this statement from one comment recently posted here:
A person working a full-time job in the richest country in the history of the world should not be allowed to live at or below the poverty level. You can try to sound like you are on the side of workers, but as long as you are against that statement, you’re just spewing more of Bill O’Reilley’s junk.
Now, I’ll ignore the fact that given the choice of listening to Bill O’Reilly prattle on about the “folks” and having a colonoscopy performed by an enraged badger, I’d have to think about it first. What matters is that the commenter wants to make a rather categorical statement about the way in which an economy should work without considering the consequences of that position.
In theory, it all sounds good. Why should anyone who works full time be below the poverty level? (In fact, very few full-time workers are.) After all, we’re the richest country on the planet, right?
This is where the rules of economics delivers a sharp kick to the groin…
There are X number of low-wage jobs out there. We have a natural rate of unemployment that’s historically somewhere in the neighborhood of 5% give or take. Some people just don’t want to work, some people are transitioning between jobs, some people are sick. Full employment isn’t economically possible, and the lessons of the 20th Century have shown that bad results occur when a government tries to make policies that mandate it.
But what of those who do work? Why can’t toilet cleaners at the 7-11 make $13/hour?
There’s no law that says that they can’t, other than the fact that people tend not to want to pay $100 for a Squishee and some Slim-Jims. The going rate for labor has less to do with government policy (a relatively small number of workers get paid at the minimum wage) than it does with how much people are willing to pay for labor. The reason why an increase in the minimum wage won’t have much of an economic effect is because so few workers actually get paid at that rate. Even a typical McJob is likely to pay more because the labor markets are relatively tight. We have a rate of unemployment that’s probably as low as it can sustainably go.
What happens if government comes in and says that 7-11 must pay their toilet cleaners $13/hour?
A few things happen: for one, 7-11 stops offering toilets for their customers. And that’s if we’re lucky.
The actual outcome isn’t some hypothetical — the banlieues of Paris are exactly the sort of consequence that comes out from a labor system that is restricted by high starting wages. The first people to get hurt are those who don’t have a lot of marketable skills – mainly immigrants, minorities, and the less educated. The result: official unemployment of over 19%, and probably higher.
If an employer knows that they have to pay a new worker $13/hour, who will they hire: a single unwed mother who is likely to have to miss work because of day care and sick kids, or some suburban teenager with his own car and good grades? It doesn’t take a genius to figure out which one is going to get a bigger advantage than the one they’ve already got.
At any given moment, any given employer can only spend so much for wages. That figure may vary over time, but a “living wage” means that employer has to make do with the same amount of money, but much higher costs. That means fewer jobs, and that means that employers are going to want to take as few risks as possible with the people that they do hire.
The “living wage” sounds good in principle, but the reality of the situation is that it would be devastating to the least fortunate among us. Even those making the prevailing wage, should they work 40 hours a week, are quite likely to be above the poverty level. Raising the minimum wage raises it for everyone — rich teenagers saving up for their Playstations, Grandpa working as a greeter for Wal-Mart, and the working poor. The problem with that is that we don’t have a societal interest in making sure that Suburban Billy gets his PS3 before the end of the summer or whether Grandpa has enough money for Viagra — we want to subsidize those who truly need the money.
Raising the minimum wage doesn’t do that. Increasing the EITC, helping to improve the educational system, and other forms of targeted relief does. The consequences of those policy changes are far less haphazard than merely raising the minimum wage.
We don’t live a perfect world where every employer can go back to the money tree and dramatically increase their personnel budgets — no matter how much we’d like that to be true. In order to craft good public policy, lawmakers need to be able to understand and avoid the negative consequences of their actions — and the better a plan sounds on paper, the worse those consequences tend to be.