Should Market Forces Set Minimum Wage?

In an Editorial about Congressional proposals to increase the minimum wage, The Orange County Register takes the position that “The market sets wages, not the U.S. government, and it’s always better if the market takes the lead.” These people just don’t get it. The logic they are applying is the same logic used to justify the electricity price gouging strategy employed by Enron and other electricity traders against the people of California and other states. This same logic is used to justify the unwarranted increases in gas prices that somehow miraculously are not offset by costs and instead transfer directly to profits for the oil companies.

In attempting to support their position, they rely on “junk science experts” who use introductory level economics to claim that increases in the minimum wage have a negative effect on employment and the economy. They quote Richard Vedder, an “author of numerous studies on the minimum wage” and economist at Ohio University; “It’s a bad idea, it doesn’t accomplish anything. The goal presumably is to reduce the poverty of people with low incomes. Yet there is no ‘statistical relationship’ between raising the minimum wage and reducing poverty,” he added. “When the minimum wage is increased, poverty does not go down. And when the minimum wage stays constant, poverty does not increase.”

According to Vedder served as “peer-reviewer” for a pro-tobacco junk science report: Science, Economics, and Environmental Policy: A Critical Examination. There are 45 documents in the Tobacco Institute documents online mentioning Richard Vedder, many of them are confidential reports listing “hired guns” in academic white lab coats that will provide expert testimony.

Nice spin guys, now let’s get to the truth.

Vedder attempts to set as the sole marker of positive impact from an increase in the minimum wage the reduction of poverty. This however distracts from the main premise of minimum wage, which is to reduce employee exploitation, and help ensure that everyone can afford to live. A more accurate measure of the positve and negative impact of minimum wage laws is to look at actual economic indicators such as unemployment.

However, even if you accept his premise, Vedder’s conclusions are incorrect. The Economic Policy Institute’s FAQ’s on Minimum Wage state; “In the past, the minimum wage has been limited in its effects on poverty because many poor families did not have any family members in the paid labor force. However, as welfare reform forces more poor families to rely on their earnings from low-paying jobs, a minimum wage increase is likely to have a greater impact on reducing poverty. The minimum wage has already proven helpful to former welfare recipients who are entering the workforce. A study of a 1999 state minimum wage increase in Oregon found that as many as one-half of the welfare recipients entering the workforce in 1998 were likely to have received a raise due to the increase. After the increase, the real hourly starting wages for former welfare recipients rose to $7.23.”

The New York Times has reported that over recent years, “hourly wages have climbed much more slowly than productivity.” Because of this, “corporate profits have increased rapidly over the past several years and account for an unusually big share of the nation’s total gross domestic product.” The Economic Policy Institute estimates that, “An estimated 14.9 million workers (11% of the workforce) would receive an increase in their hourly wage rate if the minimum wage were raised from $5.15 to $7.25 by 2008.” Of these workers, 6.6 million workers (5% of the workforce) currently earn less than $7.25 and would be directly affected by an increase. The additional 8.3 million workers (6% of the workforce) earning slightly above the minimum would also be likely to benefit from an increase due to “spillover effects.”

The Economic Policy Institute in their latest report asserts, “There is no evidence of job loss from the last minimum wage increase.”

  • A 1998 EPI study failed to find any systematic, significant job loss associated with the 1996-97 minimum wage increase. In fact, following the most recent increase in the minimum wage in 1996-97, the low-wage labor market performed better than it had in decades (e.g., lower unemployment rates, increased average hourly wages, increased family income, decreased poverty rates).

  • New economic models that look specifically at low-wage labor markets help explain why there is little evidence of job loss associated with minimum wage increases. These models recognize that employers may be able to absorb some of the costs of a wage increase through higher productivity, lower recruiting and training costs, decreased absenteeism, and increased worker morale.

  • A recent Fiscal Policy Institute (FPI) study of state minimum wages found no evidence of negative employment effects on small businesses. The March 2006 updated report is titled “States with Minimum Wages above the Federal Level have had Faster Small Business and Retail Growth.” The third paragraph of the report’s Executive Summary states: “The simplistic introductory economics prediction that an increase in the minimum wage will result in job loss clearly is not supported by the actual job growth record. Rather, faced with an increase in the minimum wage, small businesses may have benefited from some combination of higher productivity through improved worker retention and savings on recruitment and training.”

While the market has had some effect on wages by encouraging many small business owners to recognize that employees paid a livable and competitive wage stay longer and are more productive, large companies such as Wal-Mart do not. These greed-ravaged companies prefer to pay their employees as little as possible and refer them to public assistance for food stamps and health care. In the 9 years since the last minimum wage increase the so-called market forces have not sufficiently corrected the disparity between minimum wage and livable wage. In an environment where gas prices have risen more than 50% in the last year and health care and housing costs are soaring out of control it is time for Congress to address the need for an increase in the minimum wage.

I do find it intriguing that if the Register editors were to honestly apply their “market forces” argument to setting the level for a minimum wage, given the reality that many small business already pay more, the minimum wage should be increased. Given the increase in the actual costs of living, I do not see an average annual increase of 3.73% to be what the Register’s editors deem “staggering.” I find it reasonable.

The Register closes its editorial by calling upon the Orange County Congressional delegation “to oppose any increase in the minimum wage.” Given that the majority of our delegation includes the same people who opposed the extension of the Voting Rights Act, I expect that sadly they will get their wish.

It is amazing that these “free-market true believers” can somehow conclude that it is right for “market forces” to guide minimum wages, but not the wages and benefits for public employees.

Should Market Forces Set Minimum Wage?

I Don’t Think So!