Acton’s Director of Research, Samuel Gregg, recently wrote about the effects of raising the minimum wage at the National Review Online. The latest CBO report estimates that increasing the minimum wage to over $10/hour in 2016 will not greatly affect the poorest in society; it is estimated that this increase will only help 2% of those living in poverty. The benefit of the increase will go to people “already comfortably above the poverty line.” Gregg discusses this phenomenon:
Is that just?
Given the minimal (pardon the pun) effects of mandated minimum wages upon poverty, one must ask why some people invest so much intellectual energy and political capital in a policy that tends to benefit, for example, teenagers and young people from comfortable backgrounds who won’t be staying in minimum-wage jobs for very long.
In part it’s the top-down approach at work. Legislating minimum wages gives us the illusion that legislators and governments can flip a switch and make things better. Legislated minimum wages, however, aren’t immune from the workings of supply and demand.
Whether one likes it or not, employers who want their company to survive (let alone prosper) do have to consider the effects of mandated minimum wage-increases on their business’s ability to make a profit (and thereby continue employing people). And that sometimes results in a freezing or even a reduction of staff numbers in particular industries. A well-intentioned flipping of the switch, it turns out, can make matters worse for some of the very people one is trying to help.
But another aspect that’s not often considered is how policies emanating from other government institutions undermine the impact of mandated minimum wages. If, for instance, a central bank continues to follow loose monetary policy (as an ultimately ineffective way of trying to compensate for the failure of governments and legislatures to undertake the serious economic reforms that sustain growth over the long term), then the declining purchasing power of a given currency can nullify any beneficial effect of a minimum-wage increase, not to mention the gains of wage rises in general. A 3 percent decline in a currency’s purchasing power over the year, for example, more than halves the real benefits of a 5 percent wage increase in the same year.
Addressing this problem in a systematic manner would logically imply some rethinking of, among other things, monetary policy. Instead we find that minimum-wage increases are often justified by the erosion of the real value of wages. Well, that’s one way of making up some of the loss. Yet it doesn’t address one of the core reasons for the erosion. Moreover in light of continuing erosion, any benefit of the minimum-wage increase is only fleeting.
Put another way, proposals to raise minimum wages can often be a way of avoiding addressing some of the deeper problems that (1) help to keep many people just above or just below the poverty line on an economic tread-mill, and (2) leaves them with the (often accurate) sense that they just aren’t getting ahead.
Surely we can do better than that.
In Becoming Europe, Samuel Gregg examines economic culture - the values and institutions that inform our economic priorities - to explain how European economic life has drifted in the direction of what Alexis de Tocqueville called "soft despotism", and the ways in which similar trends are manifesting themselves in the United States.