Some thoughts on the minimum wage.

[Magic Poriferan]

So at RCP I came across this article from my friends at the Cato Institute.

Obama's Minimum Wage Hike: A Case of Zombie Economics


Basically, it says that instead of raising minimum wage we should abolish it, while also taking a totally superfluous jab at Paul Krugman.

A good of the article seems sound. The argument is being made that when the cost of labor goes up, the demand goes down, thus more people become unemployed, particularly those who would hypothetically most benefit from minimum wage. It seems logical and there are a number of pieces cited that I don't feel the need to criticize.

Then came the part of the article that got me asking question.

The way to create jobs and increase one’s real wage rate is not to increase the minimum wage, but to increase one’s productivity. Forcing employers to pay a worker $9 an hour when that worker produces only $7 an hour is a recipe for failure and poverty. Enacting a higher minimum wage does not guarantee a job or a higher income for all workers—only those who retain their jobs at the expense of those who lose their jobs or can’t find a job at the above-market wage.

Two things came to mind.

First, the author basically assumes that everyone on minimum wage must be producing equal to or less than minimum wage. But what if the norm is this country is for the working class to be underpaid? What if they're currently getting $7 and hour for $9 an hour of work or more? I don't know that they are, but it seems like a significant consideration being overlooked.

Second, it's interesting that the author's main problem with minimum wage is decreased employment, but suggests increased worker productivity as the alternative. As it happens, increased productivty per worker can also lead to decreased employment. This is the means by which technological advancements like automation causes unemployment. If I'm running a business and I want to maximize my profit, I'll do what I can to make workers more efficient, thus allowing me to produce the same revenues while paying less in salaries. Interestingly, in these scenarios unemployment increases, but the wages of the more efficient workers who remain does not necessarily. I notice that this sort of trend can result in workes being underpaid. Funny, I think I just mentioned something about that.

The rest of the article from there is basically just psycho-babble like this.

Economic growth, not price fixing in the form of a federally mandated minimum wage, is the only path to prosperity. Economic freedom and limited government are paramount in the process of wealth creation through mutually beneficial market exchanges.

Trite and devoid of operational meaning, I can't help but imagine the writer staring into the heavens with wide pupils and a drooling mouth.

The only other thing really worth mentioning is this.

Hong Kong did not become rich by resorting to a minimum wage; it became rich by embracing economic freedom. Likewise, China has allowed millions of people to lift themselves out of poverty by expanding the range of choices open to them, by opening markets, not by increasing the minimum wage. Until recently, there was no national minimum wage in China, and local minimum wages were typically below the prevailing market wage so as not to destroy jobs and growth. Economic liberalization stimulated real economic growth, and as productivity increased so have living standards.

Are we supposed to aspire to be China? Does the author think that policies which lift many out of poverty in an undeveloped to developing country will work just the same for a developed one? Does the author realize that part of China's staggering figures on ending poverty simply come from it having nearly 1.4 billion people to begin with?

By advising the abolition of minimum wage and comparing the USA with China, the folks at the Cato Institute are promiting the race to the bottom. They are promoting countries all across the world to try attracting and bolstering business by giving their workers the worst conditions.