DePaulia: Tweed: Minimum wage raise: it all adds up

[Tweed]

First you should read the Op-ed that inspired me to write one myself. Then you should read mine to see how the finance student got his ass kicked on an economic issue.

Here's his:

"In the summer of 2003, a majority of our state politicians unfortunately passed a bill to increase the minimum wage over a period of two years. The final installment of this bill came last month, with the minimum wage now at $6.50 per hour. The arbitrarily, artificially set minimum wage contradicts all of the fundamental principles upon which our economy rests. Additionally, the minimum wage mandate is poor policy on philosophical grounds. The free market provides several alternatives which will clearly provide better results than a mandated minimum wage.

To preface this argument, we shall begin by posing a question: Who is the minimum wage supposed to help? Undoubtedly, policy makers devised this technique to better the condition of the poor. Minimum wage proponents will often argue that low-income families need a guaranteed wage at which to work in order to survive in today’s highly competitive world. What would these proponents say to evidence that pointed to the contrary? More specifically, what if the minimum wage actually disproportionately hurts low-income families?

Indeed, the minimum wage is an abysmal policy tool because of its negative consequences. First, let us consider the damaging statistics. According to Thomas MaCurdy, an economist at Stanford University, only one out of four families in the lowest 20-percent bracket actually has a worker that earns the minimum wage. Furthermore, the few families that do rely on the minimum wage as their primary source of income only realize less than $1 out of every additional $5 earned. Much of the increased earnings go to local, state and federal income taxes, in addition to taxes for Social Security and Medicare.

The minimum wage also has deleterious effects on the business environment and economy in general. After all, who actually bears the burden of this increased cost of conducting business?

Quite simply, businesses bear the cost and have two ways to fight it. First, they can simply lay off workers and reduce their amount of hiring in the future. Secondly, they can raise prices, thereby shifting the increased costs to the consumer. So in the end, we have a policy that not only has an adverse effect on job creation, but also one that forces prices to increase.

When we combine these effects, we can identify the ways that the minimum wage fails to help the poor, and actually worsens their condition. Recall that three-fourths of low-income families receive entirely no benefits from the increased minimum wage. Yet because of the policy, they face an even more hostile economy where jobs are harder to find and goods become more expensive to purchase. In essence, lawmakers who favor not only minimum wage increases, but the idea of a minimum wage in general, effectively support the invocation a new regressive tax on low-income families.

On a more philosophical level, the mandated minimum wage represents nothing less than the coercion power of the state, and in the end an erosion of our freedom. Those of the left love to discuss freedom, yet they shun any discourse in economic freedoms—specifically, the freedom from excessive taxation, the freedom to choose to save for one’s retirement, and so on. In a truly free market economy, the government has no right to interfere with two individuals—an employee and an employer—negotiating a fair wage. After all, supply and demand will inevitably dominate. Those employers not willing to pay their employees the fair, market-based wage will lose their workers to others who do compensate their employees appropriately. Oh, the power of competition.

If we really are serious, however, in our rhetoric to help low-income families survive, let us target them directly instead of using arbitrary tactics like mandated minimum wages. To target these people, the government could provide them with housing, schooling and clothing vouchers. Taking such action will eliminate much of the waste that occurs daily within our government. If we send poor families vouchers, we solve the problem at its core, instead of using an indirect method like forcing employers to increase their costs.

In the end, however, such policy chances seem unlikely to occur. Both Republicans and Democrats would never touch the issue, for fear of political damage. So, yet again, we have a situation where government is the problem and, yes, the free market provides the solution."

Here's where he get's his ass kicked (at least I like to think so):

"Illinois legislators are making sure that the citizens of Illinois are prepared for the 21st century. That is the message that comes across loud and clear now that the minimum wage in this state has been raised to $6.50 an hour. Many conservatives from across the state and the nation are lambasting Illinois’ decision and predicting disastrous effects for the Illinois economy. Thanks to them, we are seeing quaint and outdated economic theories that applied to the 1800s and 1900s rolled out and dusted off. Perhaps if they accessed data or used sources beyond guesswork, they would see how today’s economy actually works.

The University of Illinois at Chicago Center for Economic Development (UICUED) conducted a study in 2003 to look into how the state of Illinois will be affected by this $6.50 minimum wage at the time was just being proposed. The first fact that pops out from the study and makes sense to anyone who has taken Quantitative Reasoning is that the inflation-adjusted value of the minimum wage in this state has gone from $8.27 in 1968 to $5.15 today (all figures in 2002 dollars). Indeed, inflation has been going up so quickly that only $0.13 of the $0.90 federal minimum wage increase from 1996 remains after accounting for inflation. Those numbers add up to a minimum wage worker losing 15 percent of their buying power in just six years.

The minimum wage increase does not just affect those on minimum wage either. Based on a study of 11 states with minimum wages higher than the national minimum wage, the UICUED study concluded that the 350,000 people in Illinois making between $6.50 and $7.50 will receive modest pay wages along with the 450,000 people in Illinois that were making $5.15 to $6.49. With the workforce in Illinois being 5.5 million people, simple mathematics shows us that roughly 14 percent of employees in Illinois will benefit from the legislation.

Economic conservatives argue that the people who won’t benefit are business owners who have to deal with paying employees higher salaries and regions and that ultimately will be hurt by states because business will be forced to move to other places where they don’t have to pay employees so much. That foundation collapses when the UICUED study is applied to this argument. The industries that have the most workers receiving $6.50 or less are eating-and-drinking establishments (57.9 percent), gasoline service stations (39.0 percent), grocery stores (31.7 percent) and hotels and motels (29.5 percent). Part of the humor of “Harold & Kumar Go to White Castle” is that the main characters are willing to go so far to get a tasty Slider. Perhaps conservatives don’t watch popular entertainment and think the Chicago masses are going to drive to Gary to save a couple of pennies on a burger from a Hoosier version of Tomato Head. In reality, people obtain food and gasoline locally and successful entrepreneurs will always be there to provide these essential services.

This is where conservative arguments show their age and inability to adjust to the modern world. With the rapid increase of a global economy, blue-collar jobs, such as manufacturing, have dropped sharply in the United States. The minimum-wage jobs are largely located in industries that serve local populations. If these companies leave, someone else will come in and cater to the market.

For those of you who worry about the price increases and cuts in minimum wage staff, there is no weight to this argument either. In 1998, Washington took on a $6.50 minimum wage, and the employment in the eating-and-drinking establishments industry and the retail industry both saw employment growths that were higher than or on-par with the national average and with neighboring Oregon. By 2008, the eating-and-drinking establishment industry is expected to grow by 26.3 percent. The UICUED simulation found similar expectations for the state of Illinois.

The lesson here is that we can either stick our heads in the sand of 19th century theory or move on and use 21st- century data for today’s modern world. Illinois legislators have made the right choice. As for conservative economists, UIC’s graduate school is now accepting applications: [phone]."

I didn't even have space to address the fact that vouchers aren't a free market soultion and actually make the market much more unfree because people can deny vouchers. Then if people actually have money in their pockets, they can decide to spend it however they want.