Following a string of state-level initiatives to raise minimum wages, Democrats in the Senate are salivating over the prospect of a national wage hike. Beginning with President Barack Obama’s 2008 campaign, in which he repeatedly pledged to increase the federal minimum wage on an annual basis, this issue has remained on the back burner throughout Obama’s presidency until now, when the administration is in desperate need of a distraction. The current incarnation of the proposal would put a double burden on U.S. businesses at a time when the economy needs them to thrive.
The latest effort comes from Sen. Kirsten Gillibrand, D-N.Y., who has authored a proposal to raise the minimum wage from its current rate of $7.25 to $10.10 an hour. In addition to the immediate increase, she also wants the wage indexed to inflation, putting future increases on autopilot.
A one-time increase in the minimum wage is a bad enough idea on its own, but indexing wages based on inflation is even worse. Imagine having to make plans regarding payroll, hiring, firing, raises and benefits when the wages you are allowed to pay are constantly changing based on volatile numbers coming out of the Bureau of Labor Statistics. The sheer level of uncertainty — to say nothing of the administrative costs accompanying regular and frequent wage increases — would introduce a level of nightmarish complexity to any attempts at entrepreneurship.
The minimum wage is one of those unique policies that is universally recognized as bad economics, yet persists due to appeals to emotion and politically clouded thinking. Artificially setting prices above the market level creates fewer buyers and more sellers. In the case of labor, this translates to unemployment.
Employers have a fixed amount of money to allocate to payrolls. Dictating higher wages means fewer hires and decreased hours for existing employees. Wages are not set arbitrarily at the whim of some corporate overlord but are a function of productivity. Anyone who tries to pay $10 an hour for an employee who only generates $9 an hour in revenues will quickly discover the flaw in this business model.
This is the cold, hard reality of arithmetic. In an economic environment where unemployment is already stuck at more than 7 percent and participation in the labor force is at its lowest rate since the 1970s, mandated wage increases will only damage an already stagnant labor market.
In economics, it is always important to remember what is unseen as well as what is seen. We have all heard stories about how difficult it can be to make ends meet on a minimum wage job, but those stories rarely account for the less fortunate people who cannot find jobs at all due to inflated wages reducing the demand for labor, or those who have become so discouraged that they have given up looking. These people may not make the nightly news, but their situations are every bit as desperate.