Minimum Wage Lessons from Lexington
By Nathan Richendollar ‘19
HL Mencken, the “Sage of Baltimore,” once said, “For every complex problem, there is an answer that is clear, simple, and wrong.” He and Alexandra Ocasio-Cortez wouldn’t get along.
The proportion of college-aged students, even at some prestigious universities like ours, that accede to her democratic socialist ideology is a source of amazement to me because of how completely socialism has failed around the world, and how it has hobbled the economies of so much of Europe. France, with its protective labor laws that make firing an unwanted employee near-impossible, has graced itself with youth unemployment of nearly 25% in a boom economy. Voters across Scandinavia, which is often held up as a paragon of successful socialism, are shifting toward free markets (fun fact: when the 2008-09 crisis hit, Sweden refused to bail out its native automakers, unlike the United States). Spain and the Balkan states struggle with high and persistent unemployment, partly the result of over-bloated government spending and restrictive labor laws. Yet many on the left continue their strident calls for a $15 minimum wage. Apparently, round numbers roll off the tongue. “Fight for $14.34” sounds a bit clunky. But besides the phonetics, this is lunacy in the face of current labor market conditions.
In yesteryear, with Republicans still in control of the House, the populist streak on the Right confined more to immigration and international economics rather than domestic ones, the obsession with a $15 minimum wage was an amusing display of foolishness. But with Democrats now in control of the House and openly pushing a doubling of the minimum wage, economic populism on the Right brewing, and the Virginia House of Delegates on a razor’s edge, a $15 minimum wage push is a real threat to the prosperity of both the Commonwealth of Virginia and the nation. Consider for a moment the economic effects of a $15 minimum wage.
In industries where automation is just around the corner, raising wages to $15 will ensure the instant automation of labor and the elimination of low-skilled jobs. In Maryland, where the minimum wage is $10.10/hour, many McDonald’s chains have installed kiosks where customers place their orders and wait to be served without ever conversing with a human. In such a context, low-wage workers protesting for higher wages is tantamount to a Medieval self-flagellation parade, but without the placebo of spiritual protection from The Black Death. Some are incredulous that a higher minimum wage corresponds to higher unemployment rates. They sometimes cite studies that support their claims, except for one huge flaw: these studies, including the famous New Jersey vs. Pennsylvania fast food worker study (Card and Krueger, 1993) where only the wage change differed across state lines, examine changes of less than a dollar (in Card and Krueger, $0.80) or the $1-2 range in the minimum wage, not an overnight doubling. To extrapolate effects from these studies to a $7.75 increase in the minimum wage by assuming a linear relationship is a non sequitur. To see why, extend the logic implicit in the $15/hour argument (that because studies on small increases in minimum wages have shown little effect on employment then large changes must also have no effect) to $20, or $40, or $100 per hour minimum wages. Is it reasonable to assume that these policy changes are compatible with employment for low-skilled labor? Only in an alternate universe. In contrast to small, measured increases of the minimum wage (which still accomplish nothing but at least do not wreck low-skilled labor markets), an overnight doubling would necessarily make most low-skill workers, especially in low-cost of living areas like Rockbridge County, not worth their wages and hence put them out of jobs.
Consider the input of a local business owner who wishes to remain anonymous. He started his company recently and often works with just a few employees. When I asked him what he thinks of a $15 minimum wage, he replied, “It affects everything I guess. If the wages I pay go up, my prices go up, and my customers must pay it, and then their wages have to go up, and all the prices go up.” He doubts that some of his customers would willingly pay the higher prices for his services, “They [clients] may not be willing to pay that and may turn to under-the-table people, and it would affect my business most significantly in a negative way.” This self-made entrepreneur correctly senses that arbitrary increases in wages don’t make us any wealthier, but merely induce medium and long-run inflation, and along the way, exclude some from working. As for his specific business, he predicts, “$15 out of the gate must be justified by [workers’] experience because they have to be delivering. I start people out low and then raise their pay as they start working faster. At $15, I couldn’t hire a bunch of new employees who want to learn the trade.” In short, he couldn’t provide new jobs for young people entering the workforce. According to this businessman, very few home contracting companies in California (where the minimum wage is $11/hour for small businesses and $12/hour for larger ones) will hire new apprentices or employees without previous experiences, thus limiting opportunity for native Californians to join the trades and begin climbing the ladder of economic opportunity. This effect is one with which I have some personal experience.
Over this past summer, in addition to interning for an economics professor, I worked as a painter and started with zero experience. My starting pay was $9.50 per hour, and I doubt my productivity the first week or two even justified this sum. By the end of summer, I had learned how to paint, prepare rooms for painting, and cleanup work sites more effectively. By then, my pay was $11 an hour. Living in rural Rockbridge County, $11 per hour was not chump change. A $15 minimum wage would rob other youth (and older folks working side jobs or re-entering the workforce to augment retirement income) of these sorts of opportunities and render them poorer, not wealthier. Even holding inflation constant in the face of an overnight doubled wages for the nearly 30% of workers who earn less than $10.10 per hour according to Pew Research, the costs of lost employment are immense. Contrary to the chants of angry protestors and the histrionics of certain political leaders, wages are not arbitrary inventions of shadowy economic overlords, but are measures of value determined by worker productivity. When workers produce more, as in the case of our local home contractor’s employees, the owner can afford to pay them more because they generate more value to the business.
Businesses may weather small increases in the minimum wage by simply taking a hit to profits or slightly increasing prices to customers, but an overnight doubling would destroy jobs, or at a minimum, prevent the creation of innumerable new ones. Tragically, the fact that jobs never created and higher inflation (a big part of the cost of higher minimum wages) are difficult to observe while people whose pay doubles (the benefit) are highly visible occludes many people’s thinking on the issue, as it does for steel tariffs and targeted programs like agricultural subsidies. The benefits are easy to see and the costs are hidden. But that doesn’t mean they don’t exist.
In addition to these utilitarian arguments against a large increase in the minimum wage, there is also a philosophical argument that the minimum wage itself is immoral. If my labor is my property, then how can a mere majority of my peers set limits on the rates of pay for which I can voluntarily exchange my time? This seems like an affront to all our private property rights. The principle that a majority of citizens can make mutually beneficial, morally harmless transactions with few if any externalities (as opposed to limits on the voluntary exchange of, say, plutonium, toxic sludge disposal space, or assisted suicide) is a dangerous one indeed. It means that a citizen’s livelihood is at the majority’s mercy.
As congressional Democrats push a $15 minimum wage with the political winds at their back after winning the shutdown fight, hoping that they can ride the false promise of higher living standards for all to electoral victory and re-invigorate the New Deal coalition, conservatives should inject a modicum of reality into the debate. Government fiat cannot create Nirvana.