Acton Commentary

Minimum Wage and Common Sense


At the top of the political agenda for the new Democratic leadership in both the US House and US Senate is raising the national minimum wage. The plan calls for a series of increases culminating in a boost from current $5.15 per hour to $7.25 per hour. National polls show support for the move, which means many Republicans will throw their weight behind the measure too. But will the proposed prescription actually address the problem?

What are we to make of the case for increasing the minimum wage? It is important to begin with a few basic moral distinctions, especially for people of faith. First of all, Christianity has always professed that human beings have dignity and worth because they are created in the image of God. All human beings, regardless of gender, race, creed, or ability, are deserving of respect and justice.

Second, human beings possess creativity. Our needs are met and our humanity is most realized when we can apply our intellect and creativity to the nature of things. In the words of John Paul II, “Work is a good thing for man-a good thing for his humanity-because through work, man not only transforms nature, adapting to his own needs, but he also achieves fulfillment as a human being and indeed, in a sense, becomes more a human being.”

That human beings be rewarded justly for their work is a biblical principle. Indeed, we are called to be productive so that we can possess wealth to use in God's service. The Heidelberg Catechism states that we are to “work faithfully” so that we “may share with those in need.”

The ultimate goal of the effort to increase the minimum wage is certainly a laudable one. The problem arises in the efficacy of the proposed solution and some of the assumptions that it makes.

The first assumption is that the group most often referred to as the “working poor” is a static group--the same people over a long period of time. Increasing the minimum wage would increase their income, which seems like a good thing.

But is this a sound assumption? I would guess that the vast majority of the people reading these words have, at some time and maybe for a period of time, worked a minimum wage job. The minimum wage does not encompass a particular class of people. To make this assumption borders on racism, classism, or gender bias, depending on which people you assign to it. Low paying jobs, for the vast majority of people, are entry-level jobs. They are where we begin, not where we end. Raising the minimum wage discourages employers from hiring more people and, in many instances, removes the entry point of the job market, which harms the very people those backing the increase seek to help.

The second assumption is that there will be no economic effect. People making $5.15 will soon be paid $7.15. Everything else will remain the same. But this simply isn't the case. For those who want to understand the effects of implementing a higher minimum wage, it is important to have a grasp of this truth: When the government puts in place a certain public policy, there is always some response that comes from the marketplace.

In public-policy circles, this is called the elastic effect. For instance, increasing the entrance fee to a public park by 5 percent would lead us to conclude, on the basis of logic, that the park would take in 5 percent more income than it did last year. But, in fact, this is not necessarily the case because increasing the cost may cause 10 percent fewer people to visit the park, resulting instead in a net reduction in revenue.

The problem with the minimum-wage solution is that it leads to negative consequences that are equal to--or sometimes worse than--the problem that the policy sought to remedy. Studies over the past forty years indicate that a legally determined minimum wage leads to fewer available jobs, especially for the very people the legislation wants to help. Labor economists, for example, point out that a 10 percent forced increase in wages would increase unemployment by 1 to 3 percent.

The extra costs produced by an increase in minimum-wage legislation will not be borne by the affected companies. The companies will, of course, pass along the costs to those who buy their products, which will include the employees who have just had their wages raised, thus making those same wages that much less adequate.

And while outsourcing has been demonized by many politicians, an increase in the minimum wage will only serve to encourage businesses to go to other nations, where labor costs are lower.

Failure to think through the assumptions of raising the minimum wage and disregard for the economic effects will not do anyone any good. Legislators ought to think long and hard before they lead with their hearts and ignore what their heads ought to be telling them.