Why the Minimum Wage Undermines Socialism (and doesn’t do much for Capitalism either)

Well, the preliminary results are in from the latest rise in the national minimum wage.  This is of course a hot button issue for many people who think they ought to be earning more.  It’s also a hot button for leftward leaning politicians who see the millions earned by individual CEOs and the like, who think the money ought to be spread out a little more among the workers.  The minimum wage is one of those tools that socialists and would-be socialists use to try to engineer the economy, to keep the rich from getting richer and the poor from getting poorer.

I submit to the court of public opinion (or at least my admittedly small pool of readers) the following article, published by CBS news.

http://cbs11tv.com/consumer/minimum.wage.economy.2.1099679.html

The article is surprising balanced between those who support minimum wages and those who suffer the effects–higher unemployment, fewer jobs created, reductions in hours worked…all the things that are specially prescribed to hasten the economic recovery, right?  Perhaps the most perceptive attitude is the one taken by the lady in the article who looks forward to getting a raise–if she actually gets to keep her job.

More puzzling, but less surprising, is the opinion expressed by Labor Secretary Hilda Solis, who asserts that the rise will amount to an extra $5.5 billion in consumer spending.  By whom?  The people who lose their jobs or don’t get jobs?  The people who are saving their newfound wealth for when they get laid off too?  This figure surely assumes that businesses have an extra couple of billion to spend on rising wages, and won’t cut spending in a recession.

And farther out on the political spectrum we have Holly Sklar, the senior policy advisor (fair enough; she’s clearly not much as an economic advisor) for something called Let Justice Roll, a group who wants to institute a $10 minimum wage by 2010.  “You can’t have an economy that’s based heavily on consumer purchasing power, and at the same time, not pay the consumer enough to live on,” she says, neatly tumbling into the economic fallacy that working with bigger numbers automatically translates into additional wealth.

But I digress.  The socialists say they want to reduce inequalities of income, to stop the “rich get richer, poor get poorer” cycle.  The thing is, as we see in the article, some people do see salary increases–whether that translates into greater wealth, of course, depends on whether that increase translates into general inflation.  But a lot of people end up losing their jobs, simply because their services aren’t worth $7.25 an hour–thus making the poorest of the poor poorer still by rendering them unemployable.  Considering that these are the people the socialists are supposedly trying to help, doesn’t this seem self-defeating?

***

2013 Addendum–Since writing this article (has it really been almost four years?), it has been suggested to me that there is no evidence directly tying the rising minimum wage to increases in inflation.  Perhaps not–after all, the economy is a complex thing, and it is difficult to tie definitively any single effect to any single cause.  However, there would seem to be a connection between the rising minimum wage and the trend of exporting jobs to places where labor is cheaper, which frankly doesn’t do much for lower earners either.

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5 Responses to “Why the Minimum Wage Undermines Socialism (and doesn’t do much for Capitalism either)”

  1. Benjamin Seghers Says:

    I disagree with you on some issues. Hilda Solis is probably correct that consumer spending will increase. I’m not sure $5 billion is the correct number, but then again I doubt anyone is. Anyway, it’s typically been found that a 10% hike in the minimum wage will increase unemployment of the low-skilled by about 1-3%. That’s being liberal, because a lot of studies have also found insignificant or even positive effects on employment after minimum wage hikes. So the 10% hike will increases the share of income received by minimum wage workers by 7-9%. That’s a fairly effective redistribution tool. Yes it’s true that some people might be getting laid off. However, most studies find that those hardest hit by a minimum wage hike tend to be teenagers, who are most likely to be second income earners and live with their parents. So not only is it a fairly effective redistribution tool, it’s actually well targeted.

    • thepunnery Says:

      I wonder if that 1-3% increase in unemployment of the low-skilled includes those who end up exiting the workforce. Typically, unemployment numbers don’t count that. The unemployment data also wouldn’t show the effects of reduced hours. Are the studies normalized to account for the state of the general economy when the rise occurs?

      Another possible impact comes from the “inferior goods” problem–when the price of staples like white bread rises, people tend to cut back on higher-value items like meats and veggies. Similiarly, if a business needs a full slate of minimum-wage workers, there could be cuts or foregone raises in low-but-above-minimum-wage jobs or mid-range workers.

      Presumably part of the expectation of minimum wage policy is that the cuts would pass up the food chain and be manifested in cuts or reductions at the highest levels of the company, or in corporate profits (thus unintentionally affecting stock prices and making everyone worry about their 401k); but I have no idea how much that actually happens.

      I’m not sure about your 7-9% figure. It seems like the change in the “share of income received by minimum wage workers” would depend on the size of the minimum-wage workforce as well as the grand total of wages earned in the country, as well as some correction for the states that already had minimum wages above the previous national minimum wage rate. I admit I don’t have those figures in front of me. In any event, there are still people who will be forced out of the workforce. The question is, how many.

      As far as consumer spending goes, I can only hope that the government is not using that as the chief index of the country’s economic health. After all, that’s part of what got us into this mess–consumer spending way out of proportion to actual wealth creation.

      And at the end of the day, there’s still the question of how much or indeed whether the government ought to be engaged in the redistribution business in the first place; but as the blog entry centered on the question of the M. W.’s value as a tool for implementing socialism, perhaps that’s outside the scope of the discussion at hand.

      Thanks for the thought-provoking comment.

  2. dhparker Says:

    I wondered, too, about how thathike is going to increase consumer spending. Maybe those who say it is are counting the fact that if employers want to keep their workers after a minimum wage hike, they will have to raise the prices on whatever they’re producing to pay those workers. Bigger prices=more money spent by the consumer? Unless the consumers then can’t afford to pay those higher prices. Then everybody loses.

    …Or have these pro-minimum-wage-hike people even considered that employers have to get that money from somewhere? There goes inflation.

    • thepunnery Says:

      I suppose they could always cut costs by sending the jobs to China, Mexico, India… okay, that might not work for the fast-food set, but in some industries it’s still an option.

  3. Benjamin Seghers Says:

    Consumer spending will increase because minimum wage earners are consumers. When they have more income, they will consume more. That why people say consumer spending will increase. Of course, firms will typically respond by either raising prices or cutting spending.

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