Hot Topic: The Wages of Politics
A hike in the national minimum wage seems all but certain to become one of the first fruits of the Democrats' victories this week. Nancy Pelosi, the presumptive Speaker of the House, has pledged to raise the minimum by over $2, to $7.25 from $5.15. And President Bush has already signaled he'd go along. At the state level, six states not only approved minimum wage hikes in referendums this week but indexed the minimum to inflation going forward. We hope Mr. Bush fights off any attempt at federal indexation and insists on a provision to protect small business.</br></br>Raising the minimum wage has been a hardy perennial of the left for decades now. What is striking is the degree to which is has come to be seen as an economic free lunch. Even some reputedly unbiased economists have started to tout the view that raising the minimum wage has no discernible effect on job creation.</br></br>But if this were true, they'd be calling for a $10, $20 or even $50- an-hour minimum wage. They're not, and neither is Nancy Pelosi. That's because the law of demand is one of the most dependable precepts of economics. It says that when the price of something goes up, demand for it goes down. An employee's wages are the price the employer pays for his services, so raising their wages means forcing employers to pay more for workers. The price goes up and there is downward pressure on demand for workers. Other things being equal, jobs are lost.</br></br>For a long time, this was so obvious that no serious person doubted it. But a couple of studies in the 1990s purported to find no evidence of job loss associated with minimum-wage hikes, and it's been off to the races ever since. Classical economics teaches that for a given job, there is a market-clearing price -- the price at which both someone is willing to do it and someone else is willing to pay them to do it. If you raise the legal minimum above that price, you may get more people willing to perform the job, but you'll probably also get less people (employers) willing to pay the new, higher price to get the job done.</br></br>To picture how this works, think about the grocery bagger in the supermarket, a classic low-wage service job. Supermarkets hire grocery baggers for the minimum wage, or close to it, because it's a perk that makes their customers' experience a bit nicer and helps move the lines along, possibly requiring fewer cashiers, who cost more to hire than grocery baggers.