The Minimum Wage


This page was last updated on February 24, 2014.


If you understand the economic principle of supply and demand, and higher prices for goods and services result in lower consumption, you can save yourself some time and stop reading right here.  You already know what you need to know.  Otherwise, please keep reading.

For some data on this topic, please read “Characteristics of Minimum Wage Workers: 2012” by the Bureau of Labor Statistics (BLS).  One stat sticks out; employees covered by the minimum-wage law who earn no more than the federal minimum make up only 2.1% of the workforce.

Keep in mind this variation of Sir Isaac Newton’s Third Law of Motion: For every action there is a reaction.  Another way to state that is, the world is not static and nothing happens in isolation.  You can find more on this topic in my paper with the original name of “Economics.”

At its theoretical best, the minimum wage is a feel-good exercise that does nothing.  In practice, however, the minimum wage does harm.  In both cases the minimum wage is akin to a dog chasing its tail.

An unspoken (usually) motive for some minimum wage supporters is to buy votes and/or increase tax revenue without enacting tax-rate increases.

For the purposes of this paper, I treat “minimum wage” and “living wage” as synonymous because they differ only in magnitude.  That said, a “living wage” raises additional questions.  For example, assuming all other things are the same, should a single person with dependents receive a higher “living wage” than a single person without dependents?  Should the employee’s “living wage” depend on how many dependents he has?  If there are two earners, should each receive the same “living wage” as a single earner?  Should the “living wage” vary depending on age, sex, and so on?  A “kissing cousin” of the minimum wage is the “prevailing wage” requirement of many government contracts.

Resurrecting a paper he published on one of his outlets in 1997 (A New Social Contract: The Need for Radical Reforms in the Fight for Jobs and a Living Wage), Carl Davidson (a self-described Marxist) at Beaver County Reds (BCR, aka Beaver County Blue) pushes what he calls a “social wage.”  A follower wrote, “There has always been significant support on the democratic left for a guaranteed basic income for all, come the revolution!”  Mr. Davidson replied, “My argument above is not quite a ‘guaranteed income for all.’  Apart from the elderly, children and the disabled, you have to do something to get it, you have to create value.  You can create value by raising kids, being a diligent student, or coaching youngsters at sports in a park.  But you have to create value, even if outside the traditional market.  One way is to serve as a volunteer for any of a million NGOs to certify it.  So my proposal boils down to a ‘starter income for all’ except true ‘free rider’ wannabes.  I think you could unite a solid majority around that idea.”  Let’s ignore the loss-of-liberty aspect of this idea for a minute.  The Devil is in the details, of course.  Who defines who are “the elderly, children and the disabled” and “true ‘free rider’ wannabes?”  Who determines what activities “create value” and how much?  This is where the “social wage” eventually turns into “a guaranteed basic income for all” even if that weren’t (it is) the starting point or the original idea.  Who determines which of the “any of a million NGOs” qualify?  For that last question, does the IRS treatment of mostly conservative groups seeking non-profit tax status ring any bells?  As for the “you could unite a solid majority around that idea,” that was also true for Prohibition and the federal income tax.  We know what happened to Prohibition (enacted via the 18th Amendment and the National Prohibition Act in 1919, repealed via the 21st Amendment in 1933).  Had Americans of the day known what we know now (zero individual financial privacy via the financial “full body cavity search” we go through every year when we must detail every aspect of our finances, abuse of power, etc.), would we have a federal income tax (enabled via the 16th Amendment in 1913)?  From 2009-2013, Gallup polls reported 67%-72% “Americans rated their personal healthcare coverage as excellent or good.”  (Note: Even though Obamacare became law in 2010, insurance-policy mandates didn’t take effect until 2014.  Therefore, 2013 medical-care insurance policies were still pre-Obamacare policies.)  Had Americans been told the truth about Obamacare (the opposite of “you can keep your medical insurance and healthcare providers if you like them” and “your family’s medical insurance will cost you $2,500/year less”) in 2009-2010, would their Democrat “representatives” still have voted for Obamacare?  There are more examples, but you get the idea.

Finally, the minimum wage, living wage, or whatever you want to call it is an assault on freedom.  Why can’t two parties determine mutually-agreeable compensation without government interference, as we mostly do when buying other goods and services?  (Note: Depending on the location, government also sticks its nose in buying goods like cigarettes, gasoline, milk, and so on by setting minimum prices, subsidies, et cetera.)

When prices increase …

Let’s say the price of your favorite brand/flavor of ice cream just went up.  What would you do?  Here’s a small list of potential reactions.

·       Buy less of your favorite ice cream.

·       Buy a cheaper brand.

·       Buy the same amount of ice cream by spending less on other things.

·       Some combination of the above

The penultimate point is especially interesting because it shows your reaction to the price of ice cream could affect a completely unrelated good or service.  For example, you choose to keep buying the same amount of your favorite ice cream using some of the money you saved by firing the guy who mows your lawn.  The next question is, what choices will the lawn guy make in reaction to losing your business?  And so it goes, on and on.

Regardless of the good or service, the thought process about what to do about a price increase is the same.  That is, what is the best way for a family or individual to react to a price increase?  The answer isn’t the same for everyone because we have different goals, needs, wants, and so on.  This process also applies to businesses.

I know no one who would disagree with this analysis, yet minimum-wage proponents always tell us businesses will keep “buying” the same number (or more in some cases!) of minimum-wage employees when their price increases.  A Congressional Budget Office (CBO) report discussed later in this paper takes issue with this position of minimum-wage proponents.

How wages are set

Before we get into the minimum-wage discussion, we need to understand how an employer determines how much he can afford to pay for a specific job.

Though leftists tend to believe differently, the purpose of a business is not to generate jobs and tax revenue.  Businesses exist to generate income for the owner’s family, even when the owners are only shareholders.  Jobs are generated by a business only as long as they increase the employer’s income.

When a business considers hiring an additional employee, it is only because the owner determined additional manpower may allow the owner to make more evil profit and provide a better economic life for his family.  Without the incentive of earning more profit for the owner, there is no job.  First, though, the business owner must determine the economic value of the potential job.  For now let’s say the job’s economic value to the employer is the gross revenue directly and/or indirectly generated (how much customers pay) by the job minus the job’s costs (employee compensation, equipment, fees, taxes, training, and so on).

The economic value of the job determines the total compensation the employer can offer an employee while providing the business with its target profit.  Once things like overhead, workman’s compensation, target profit, various taxes, fees, et cetera are subtracted from the job’s anticipated revenue, the employer can determine the total compensation he can offer an employee.  Total employee compensation includes wages/salary, the cost of benefits (vacation, medical insurance, et cetera), and the mythical “employer’s portion” of payroll taxes (Socialist Security and Medicare).  The gross wage/salary offered/paid to the employee (what appears on the paycheck stub) is the total compensation less the cost of benefits and the “employer portion” of payroll taxes.  Since the paycheck stub doesn’t show the payroll taxes held back by the employer and the cost of benefits, most of us think our benefits are “free” and there really is an employer portion of payroll taxes.

If the economic value of a job to the employer is less than the minimum wage, that job won’t exist.  Stating the obvious, employers can’t stay in business and pay more than a job is worth.

Our local lefties at Beaver County Reds posted a link entitled “How Billionaire Businesses Expect the Public to Subsidize Their Low Wages and Opposition to Unions.”  I published a critique of the linked piece and it generated the following Facebook exchange.

Carl Davidson: “So the interesting question is, how does ‘the economic value of a job to an employer’ get determined?  The employer’s whim?  The amount of value created in the time the worker is at work, less other fixed costs?  Or Marx’s view, that it’s the average socially necessary labor time required for said labor to reproduce itself, ie, survive and raise the next generation?  There’s obviously a good deal of wiggle room between the first and the second, and that’s where workers and their employers battle it out.  Some of us choose one side in this contest, some the other …”

My response: “Mr. Davidson, it’s up to the employer – the owner of the job - to determine the economic value of the job to his specific business, no one else.  It’s also important to note the value of a given job will vary depending on the specific employer, goals, industry, location, and so on.  I don’t care what criteria the employer uses and it’s none of my business anyway.  If the employer chooses wisely and otherwise runs a good business, he’ll likely be successful if he’s selling a good or service people need or want.  If the employer chooses poorly, his business will likely fail.  It’s that simple.”

Unless you read his comment carefully, you may have missed Mr. Davidson doesn’t believe a business owner should be allowed to determine (“the employer’s whim”) how much he pays for any given job, not just a minimum-wage position.  As a self-described Marxist, Mr. Davidson goes with “Marx’s view, that [a job’s economic value is] the average socially necessary labor time required for said labor to reproduce itself …”  To implement this affront to liberty means someone in government would calculate “the average socially necessary labor time required …” and the corresponding compensation.  The business owner would be given the following choice; pay the government-mandated compensation package or kill the job.

Job pay is not about personal worth

One of the covers of Bloomberg Businessweek (BB) for the February 17 – February 23, 2014 issue displays the headline “How Much Is He Worth?”  Under the headline is a photo of a man holding a sign saying, “I’m a baggage handler.  I handle more than a thousand bags a day.”  BB identifies the gentleman: “Nate Smith, 21; Philadelphia; Works 40 hours a week; Covers the weekend shift; Earns $7.25 an hour.”  This is a tactic to get emotion involved and to blur the debate.  Far too often we hear minimum-wage promoters talk about pay as if it’s a measure of a person’s worth.  How often have you heard a minimum-wage supporter say something like “People are worth more than $x per hour?”

A job’s pay is not a measure of the employee’s personal worth.  A job’s pay reflects the economic value of the job to a given employer, nothing more.  A job’s economic value determines the wage, not the potential economic and/or non-economic value of the employee.  For example, if a job’s economic value is $5/hour, a business can’t pay someone more even if the person is a rocket scientist.

Finally, there’s no such thing as an unworthy job.  When I was a kid, others would make fun of the school janitor simply because he was a janitor.  Regardless of a job’s pay, we should respect someone who earns his livelihood.

Who pays for a minimum-wage increase?

In his 2013 state-of-the-union speech, President Barack Obama said,

“We know our economy is stronger when we reward an honest day’s work with honest wages.  But today, a full-time worker making the minimum wage [$7.25/hour] earns $14,500 a year [$7.25/hour x 50 weeks x 40 hours/week].  Even with the tax relief we put in place, a family with two kids that earns the minimum wage still lives below the poverty line.  That’s wrong.  That’s why, since the last time this Congress raised the minimum wage, 19 states have chosen to bump theirs even higher.

“Tonight, let’s declare that in the wealthiest nation on Earth, no one who works full-time should have to live in poverty, and raise the federal minimum wage to $9.00 an hour.  (Applause.)  We should be able to get that done.  (Applause.)

“This single step would raise the incomes of millions of working families.  It could mean the difference between groceries or the food bank; rent or eviction; scraping by or finally getting ahead.  For businesses across the country, it would mean customers with more money in their pockets.  And a whole lot of folks out there would probably need less help from government.  In fact, working folks shouldn’t have to wait year after year for the minimum wage to go up while CEO pay has never been higher.  So here’s an idea that Governor Romney and I actually agreed on last year -- let’s tie the minimum wage to the cost of living, so that it finally becomes a wage you can live on.  (Applause.)”

For context, Mr. Obama’s “$9.00 an hour” minimum-wage proposal is a 24% ($1.75/hour) increase, and a 52% increase ($3.75/hour) since May 2007.

Given the title of this section, you probably noticed Mr. Obama didn’t mention who would pay for the increase.  You can rest assured none of those representatives and senators who applauded Mr. Obama gave any thought to the source of the pay raise either.  Neither did Mr. Obama mention the arbitrary, unearned increases drive up the cost of goods and services.  As of early 2014, Mr. Obama is campaigning for a $10.10/hour minimum wage.  Mr. Obama also signed an executive order requiring federal contractors to pay the $10.10 minimum beginning January 1, 2015The Obama administration was not happy when the CBO reported increasing the minimum as Mr. Obama wants could cost from few jobs up to 1,000,000, with a “Central Estimate” of 500,000 lost jobs.  Here’s something to ponder.  Mr. Obama says the increase is both good for the country and good politics.  If so, why does Mr. Obama’s executive order not take effect immediately instead of two months past the 2014 mid-term elections?  Isn’t this exactly what Mr. Obama has been doing the past few years when especially-toxic Obamacare regulations were/are expected to have an adverse effect on Democrat candidates in a federal election?

For context, Mr. Obama’s $10.10/hour minimum-wage proposal is a 39.3% ($2.85/hour) increase over the current minimum, and a 92.4% increase ($4.85/hour) since May 2007.

So, who does pay when the cost of a good or service increases?  It depends.

In “When prices increase …,” I gave some simple reactions to a simple price-increase scenario.  Here are several potential reactions a business owner may consider when one or more production costs increase.

·       Raise prices

·       Cut employee benefits

·       Cut jobs

·       Increase automation

·       Cut profit

The approach or combination of approaches used by a specific employer will vary because the right answer isn’t the same for every business.  That’s because each business has its unique combination of assets, customers, employees, products, services, competitive environment, financial situation, goals, needs, wants, and so on.

After the employer reacts to the increase, competitors, customers, employees, et al will react to the employer’s moves.

Ultimately, the minimum wage hurts the very people we’re told it will help.  Depending on the given employer, eventually the minimum wage makes it too expensive to hire employees, especially those susceptible to replacement by automation, such as toll collectors, checkout cashiers, et cetera.  In at least three cases, the cost of an employee got high enough that customers actually replaced the employee.  One example is the automated checkout line at your supermarket where you – instead of a cashier – get to scan your purchases and pack your grocery bags.  Remember when someone taking your groceries and loading them into your car was standard practice instead of an incredibly rare event?  When was the last time you pulled into a gas station and an attendant pumped your gas, checked fluid levels under the hood, cleaned your windshield, and so on?

Arguments for

Below are some arguments we hear in support of the minimum wage and its increases.

·       Without a minimum wage, employers would pay slave wages.

To supporters of the minimum wage, wages below what they deem acceptable are “slave wages.”  In any case, the marketplace keeps successful employers from paying too little or too much for a job.  Further, no one forces a person to take a job.  If a person can get a job elsewhere for higher pay, he will take the higher-paying job.

·       “I believe that anyone who works 40 hours a week, 52 weeks a year should not live in poverty in the richest country in the world.” – U.S. Sen. Edward Kennedy (D-MA) on the Senate floor (March 7, 2005).  Mr. Kennedy made a similar comment in 2000.  Most lefties take Mr. Kennedy’s position to mean, regardless of a job’s economic value, a person working at it full time (40 hours per week) should earn enough to support a family of four without being in poverty.

This position is so far off the deep end I don’t know where to start.  Who in their right mind believes pay for our least economically-valuable jobs should be high enough to keep a family of four out of poverty?  As I noted previously, employers can’t stay in business and pay more than a job is worth.  This position is simply support for another distribution mechanism for welfare.

People in poverty aren’t there because the minimum wage is too low.  With relatively few exceptions, people in poverty are there because they made bad choices.  More than anything else, where we land is the cumulative result of choices – both good and bad – we make throughout our lives.  In “Left Behind” (June 1, 2003), the Beaver County Times profiled two poor families.  In both cases, individual irresponsibility caused the alleged poverty.  In one case, a single mother of four children headed the “family.”  The children had three fathers and the mother had never been married to any of them.  In the other case, the guy admitted he mostly screwed around until he was nearly 30 years old and by then felt it was too late to do anything about his situation.  That didn’t stop him from getting married to a woman with a child, however.  How did the BCT present these persons?  As people the economy “left behind.”  These folks were not left behind.  When the bus of opportunity stopped, these folks chose not to get on.  You can find two more examples in my critique of “Are we not deserving?”  We cannot lift people from poverty by taking from those who earned their family’s paycheck and giving it to someone who did not.  This merely pins people to what made them poor in the first place.  People who make bad choices have no right to expect taxpayer (or customer, employer, and so on) dollars as a bailout.  We should not “reward” those who make bad choices and punish those who live their lives responsibly.

Should people in need get help?  Of course, but from private charities funded by voluntary contributions, not by confiscated earnings.  There is nothing compassionate about the government taking from one family’s paycheck to give to someone who didn’t earn it.  There is nothing altruistic or charitable about telling government to rob from Peter to pay Paul.  Compassion is when a person freely chooses to use his own paycheck to help someone in need.

·       Increasing the minimum wage means employees have more money to spend and this stimulates the economy.

The implication is someone who receives an arbitrary, unearned raise stimulates the economy better than the people who actually earned the money used to pay for the increase.  This argument ignores the fact that the increased wage came from somewhere and there is an alternative disposition.  For the sake of simplicity, let’s assume “somewhere” is the employer.  Was the employer going to stuff the money under his mattress or burn it?  Of course not.  The employer could spend the money on his family, invest in his business, invest in other businesses, hire more employees, pay off debt, et cetera.  As I note later in this paper, sometimes the “somewhere” is a fellow employee.

·       Henry Ford implemented a minimum wage (5$/day) so his employees could buy the cars they built.

This is a popular myth but it’s not true.  The intent of Ford’s minimum wage (Ford called it profit sharing) was to reduce the cost of high employee turnover (especially the best employees) in a high-wage area.  (Note: Ford’s minimum wage came with some strings attached.  For example, the minimum wage didn’t kick in for an employee until he worked at least six months for Ford.)  Had all businesses been forced to implement the same minimum wage, Ford’s turnover problem would have remained.  What made Ford’s minimum wage work for Ford was its employees were paid more than the next guy, not the same.

As mentioned previously, a usually unspoken reason some support minimum-wage increases is because they believe it increases tax revenue.  Remember, the feds impose payroll taxes (Medicare and Socialist Security) of 15.3%.  Add to that local, state, and federal income/wage taxes and a minimum-wage increase theoretically generates windfall tax revenue for all levels of government, all without passing a bill to increase tax rates.  If so-called “windfall profit” is bad as lefties tell us, isn’t windfall tax revenue bad as well?  Don’t forget the windfall dues provided to labor-union management to fund political activities.

When opponents of the minimum wage and its increases note it makes businesses less competitive, supporters of the minimum wage claim it does not.  The supporters know better, of course.  Otherwise they would propose not just a “minimum wage” or “living wage,” but a “wealthy wage” that would make everyone rich.  When you ask a minimum-wage supporter why he doesn’t propose a minimum wage of $30/hour vs. $7.25/hour (the current federal and Pennsylvania minimum wage), he’ll likely say that would hurt business.  Ask him how much an employer can increase wages without hurting business and he’ll change the subject or go off on some “greedy employer” tack.

Our local lefties at Beaver County Reds posted a piece entitled “The Minimum Wage Would Be $21.72 An Hour If It Rose With Productivity Since 1968.”  The source for the productivity portion of the paper is “The Minimum Wage Is Too Damn Low” (John Schmitt, Center for Economic and Policy Research, March 2012).  The CEPR is a lefty think tank.  Read the paper and you’ll find no discussion of what may have caused the claimed productivity increase.  There’s a reason.

I was a minimum-wage ($1.60/hour) stock boy in 1970, one of the original three for Horne’s (the space now occupied by Boscov’s) in the Beaver Valley Mall.  Our job included unloading and loading trucks, moving stock into stockrooms throughout the store, and just about any unskilled odd job that needed to be done.  In what way is a current-day stock boy fresh out of high school more productive than those in 1970?  Can he push heavier carts, lift heavier stock, load/unload carts faster, push carts faster, et cetera?

I suspect you’ll find a big chunk of any productivity increase was capital investment by employers.  For example, when my post-college employer (an evil multinational oil company) bought me a calculator to augment my slide rule, I was able to spend a lot less time making calculations and more time analyzing and using the results.  When grocery stores replaced price stickers with bar codes, stock boys could replenish the shelves quicker because they no longer needed to put price stickers on every bottle, box, can, package, et cetera.  Stock boys also no longer needed to update the stickers when prices changed.  Cashiers could checkout customers faster because they no longer needed to punch every item’s price into the cash register.  The examples go on and on.

Another Beaver County Red posted a piece entitled “Productivity Sharing: There Ought to Be a Law.”  This commentary at least mentioned contributors to productivity, though it still missed the boat.

The author wrote, “Workers collectively make a very large contribution to productivity growth, and thus should share in its benefits.  Though ‘investment in new technology’ also makes a substantial contribution, it is not as large as the roles played by workers’ tacit skills and on-the-job ingenuity as well as their technical education and formal on-the-job training.”  The author didn’t provide any supporting examples.

Are the “tacit skills and on-the-job ingenuity” of today’s newly-hired stock boys greater than they were in 1970?  If so, are they relevant to the job of stock boy?  That is, do the alleged greater skills and ingenuity contribute to a stock boy’s productivity?  How many ingenious ways are there to roll carts on and off a truck?  Does more “technical training” make a stock boy more productive?  As for “formal on-the-job training,” the employer pays for the training in addition to the employee’s wage.

The piece also cites a February 2012 poll claiming “Nearly three-quarters of likely voters support increasing the minimum wage to $10 and indexing it to inflation (73% support, 20% oppose) in 2014, including a solid 58% majority who feels that way strongly.”  The poll alleges 50% of Republicans also support such an increase.  The piece failed to note the pollster (Lake Research Partners) is a leftist “national public opinion and political strategy research firm … [that] feels privileged to work with [their] clients to advance progressive ideals.”  Forgive me for being skeptical of poll results that happen to support the ideology of the pollster.

The piece concludes with “Even Obama’s modest plan to raise the minimum wage is expected to face intense opposition from Big Business and its lobbyists.”  Apparently we’re supposed to believe smaller businesses are all for increasing their cost of labor and thus their cost of production.  While most businesses with less than $500,000/year of gross revenue are exempt from the minimum-wage law, they aren’t immune from the effect an increase has on the labor market in which all businesses participate.

The hypothetical best case

The best case would occur if a minimum wage did no harm.  You’ll read why below.  The problem is the only place the hypothetical best case can happen is in a completely closed economy.  By a completely closed economy I mean a country that permits no cross-border trade and forbids citizens from leaving.  Not even the USSR was this restrictive so we’re talking about a very hypothetical exercise.

Though there are various actions that can result from a minimum-wage increase, let’s assume an “ideal” situation in which the increase has absolutely no effect on employment.

Even in this hypothetical exercise, a minimum-wage increase places upward pressure on all wages.  Why?  In general, we are all paid consistent with the economic value of our job, and the economic value of a job is relative to other jobs.  When we arbitrarily raise wages for one group, that action causes ripples in the rest of the economy.  For example, if you currently earn $2/hour more than the minimum wage, will you accept the same wage if the minimum wage is jacked up $2?  No.  Otherwise, you’re accepting less than is consistent with your job’s economic worth relative to the minimum-wage job.  Indeed, some labor-union contracts are indexed to the minimum wage and this can result in a dues windfall.  As a result, all wages eventually increase to restore “equilibrium” and this action results in higher prices for goods and services.  Once the ripples settle down, the guy “earning” the minimum wage is back at square one, assuming the employer can still compete with his foreign competitors and the employee still has his job.  That’s why I refer to this exercise as akin to a dog chasing its tail.

Even proponents inadvertently concede increasing the minimum wage is futile.  Indeed, the Democrat Caucus of the Pennsylvania House accidentally admitted as much several years ago when it asserted, “Raising the minimum wage will help all workers, even well-paid workers, as the rising tide lifts all boats.”  The minimum wage can help low-income employees only if it permanently increases pay relative to everyone else, but that’s impossible in a free society.

As mentioned previously, one of the reasons given for an increase is to increase the buying power of the minimum-wage earner.  In this regard, the attempt is futile.  Here’s why.  Since we already assumed there would be no jobs lost, other reactions to a minimum-wage increase include the employer accepting less profit (“eating” the increase) and/or increasing the price of his products.  For this exercise we’ll assume the businesses increase their prices.  These price increases drive up the cost of living, and that cost-of-living increase eventually eats the minimum-wage increase.  If the employer eats the increase, he has less money to spend on his family, invest in his business, invest in other businesses, hire more employees, pay off debt, et cetera.

The real world

A fundamental assumption in the previous case study was increasing the minimum wage would not result in lost jobs.  We know that’s not the case in the real world, however.

Several years ago I discussed this topic with a minimum-wage supporter and gave the retired gentleman the shorthand version of this paper.  The gentleman listened politely but claimed I was wrong.  “Besides,” he said, “everyone deserves a living wage.”

About a year later this gentleman came up to me and said, “Remember that discussion we had about the minimum wage?  You were right.”  What I didn’t know when we first spoke was this man held a part-time, minimum-wage job with a non-profit organization to augment his primary retirement income.  When the minimum wage increased, this gentleman lost his job because the organization could not afford to give everyone a raise.  Therefore, the jobs with the least economic value were dropped so the freed-up compensation could be used to give the required increases to holders of more economically valuable jobs.  Yes, even non-profit organizations must consider the economic value of their jobs.  I hope this gentleman’s co-employees thanked him when he went out the doors on his last day.  After all, he paid for his co-employees’ pay raises, not some “greedy rich guy” or “compassionate” activist/politician.

Another fundamental assumption in the previous case study was a closed economy.  In the real world, of course, we have worldwide trade.  So what happens when we force U.S. employers to pay more than is consistent with a job’s economic value?  One or more things can happen depending on the individual employer and the business’ market.  These potential reactions include the business “eating” the increase, increasing prices, cutting jobs, offshoring jobs, moving, and going out of business.

For this example, let’s assume the business has little choice but to increase prices.  The price increases put the business at a competitive disadvantage with businesses in other countries.  Ultimately, this can cause the business to go under or move at least some jobs offshore.  U.S. jobs are lost in either case.  The same thing can happen when one state’s minimum wage is higher than another.  In that case, the jobs may “only” move to another state instead of another country.  Even though U.S. jobs may not be lost, local jobs are.

The typical response to offshoring is to call for import tariffs.  Protectionism doesn’t work for at least two reasons.  First, import tariffs tend to spark trade wars.  That is, if we place a tariff on products imported from Bobsylvania, Bobsylvania will increase/place tariffs on products it imports from the U.S., hurting the employees of the companies affected by the retaliatory tariffs.  The Smoot-Hawley Tariff Act of 1930 is an example.  This protectionist act (sponsored by Republicans, sadly) imposed high import tariffs and resulted in a trade war that killed U.S. exports.  A chunk of the blame for turning a “run of the mill” recession into the Great Depression belongs to Smoot-Hawley.

Second, even if the tariffs don’t result in retaliation, U.S. customers are still stuck with higher-than-market prices.  This hurts retail consumers like you and me plus businesses who use the products/services to make their own products and services.  For example, after the U.S. imposed tariffs on imported steel in 2002, domestic steel-consuming manufacturers (appliances, cars, trucks, et cetera) were at a competitive disadvantage to foreign manufacturers because the foreign manufacturers paid less for the same steel.  Another example is sugar.  Currently, sugar import tariffs tend to make using sugar too expensive in the U.S.  Did you know just about every Coca-Cola bottler in the world uses sugar to sweeten Coca-Cola, except for U.S. bottlers?  According to an episode of Ultimate Factories on the National Geographic Channel (about 3:20 into the video), U.S. bottlers use high-fructose corn syrup as the sweetener because corn subsidies and sugar import tariffs make using sugar too expensive in the U.S.  When using high-fructose corn syrup isn’t an option, the sugar tariff places U.S. food manufacturers at a competitive disadvantage with foreign food manufacturers because the U.S. manufacturers must pay above-market prices for sugar.

© 2004-2014 Robert W. Cox, all rights reserved.