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The danger of looking past economics and raising the minimum wage

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This past week, one of the rising political figures in the Democratic Party, Mayor Peter Buttigieg of South Bend, Indiana penned an op-ed for the South Bend Tribune arguing that raising the minimum wage is “the right thing to do.”

Mayor Buttigieg, cites three reasons why he believes raising the minimum-wage is the right thing to do: It’s good for business, good for the economy, and good for family.  All these “goods” assume that raising the minimum-wage does not reduce employment.

So what do basic economic principles say about raising the minimum wage? Take a look at this graph.

What you see is a graphical representation of what a labor market looks like with a minimum-wage.  The curve marked with an “S” represents the supply of labor at the given price and quantity and the curve marked with a “D” represents the demand for labor at the given price and quantity.  Where those two curves intersect is what economists refer to as market equilibrium, it is what the market wage would be without any external interference.   The dashed line above the equilibrium represents a price floor and in a labor market it is also known as the minimum-wage.   The minimum-wage means that labor cannot be bought or sold on the market below that level.  The distance between the demand curve and the supply curve at the minimum-wage line represents a surplus and in a labor market this is called unemployment.  As you can see, the amount of labor being supplied is greater than the amount of labor being demanded.  According to this economic theory, when an artificial price floor is put in place, unemployment is created.  And when the price floor is increased, so is unemployment.  None of this theory matters, according to Buttigieg.  Later in the editorial, he makes the claim that we don’t need to rely on economic theory because historical data shows us that “increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers.”

What Buttigieg is claiming, doesn’t make any sense.  First he says that we don’t need to rely on economic theory, which shows us the negative effects of a minimum wage, because we have historical data.  Then he says that this historical data of increases in the minimum-wage show little or no negative effect.  So why does Mayor Buttigieg suggest that we continue down this path, that according to economic theory and historical data, produce negative effects?

The most bizarre aspect of the fight to increase minimum-wage is that its proponents are advocating for policies that put the very people they claim to care about at the most risk of losing their jobs.  This study conducted by the Mercatus Center at George Mason University, offers empirical evidence of how increasing the minimum wage creates higher unemployment among the least-skilled, least-experienced, and least educated workers.  Not only is this fight counterintuitive, but it is also the continuation of a historically racist movement.

Economist Thomas Sowell has written about this in the New York Post:

In South Africa during the era of apartheid, white labor unions urged that a minimum-wage law be applied to all races, to keep black workers from taking jobs away from white unionized workers by working for less than the union pay scale.

Some supporters of the first federal minimum-wage law in the United States — the Davis-Bacon Act of 1931 — used exactly the same rationale, citing the fact that Southern construction companies, using non-union black workers, were able to come north and underbid construction companies using unionized white labor.

It’s amazing that supporters of a minimum-wage once understood that it could be used to price certain people out of the market, and today the supporters of increasing the minimum-wage claim to care the most about those same people.

Increasing the minimum-wage is not the right thing to do.  It would only have further negative effects on employment which would result in a domino effect on the economy, business, and families.  Ignoring economic theory is not how we should care for the “least of these” in society, and instead of creating more economic barriers we should be taking steps to remove what is already holding back the most vulnerable from reaching their full potential.

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Kyle Hanby

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