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August 2, 2006

Jack Covert Selects: Economics and Minimum Wage

By: 800-CEO-READ @ 2:02 PM – Filed under: Current Events & Public Affairs


David Henderson, author of Making Great Decisions In Business and Life, had an op-ed in the Wall Street Journal yesterday. It's titled If Only Most Americans Understood [sub. needed]. Making Great Decisions was a Jack Covert Selects in January and I thought I would share a small excerpt from the piece:
Most people see the issue as a no-brainer. Wouldn't it be nice to raise the wages of the lowest-earning people? Even if they understand that this will cause them to pay higher prices on goods and services, they see that as a worthwhile price to pay. But economists of various political stripes tend to oppose the minimum wage. We understand that it will help only a subset of the people it is thought to help, and will help them only a little -- while hurting some of them a lot.

The reason goes back to the second sentence quoted in the above Times editorial. In raising the minimum wage, the government doesn't guarantee jobs. It guarantees only that those who get jobs will be paid at least that minimum. But precisely by requiring this, the government destroys jobs. Someone to whom an employer was willing to pay only the current minimum wage of $5.15 might not produce enough to be worth paying, say, $7.25.

It's not all or nothing. Some of the workers currently earning $5.15 would find their wages rising to $7.25. But the marginal tasks, the least important tasks in the workplace, would no longer be worth doing, thus costing jobs. In the longer run, employers will find more capital-intensive ways of doing these tasks.