Senator Kerry: Why Not a $20/HourMinimum Wage?



July, 2004 

Let’s start out with where we agree: We would all like everyone’s wages (in real terms) and standard of living to be higher. The question is not the objective, but how to achieve it. John Kerry thanks you can just pass a law and … Shazam!! – $7/hour minimum wage.

 So why not $20/hour? Oh, might there be some negative consequences of arbitrarily dictating a higher minimum wage? Well, if the consequences would be disastrous at $20/hour, maybe they are merely bad at $7/hour. Other than cynically hoping to gather more votes with this proposal, what economic models or theories does Mr. Kerry have in mind that indicate anyone is better off with his proposal? Facts are stubborn things and the plain truth is that nearly everyone is worse off with minimum wage laws. And the higher they are, the more the damage.

After the legal minimum wage is increased, the economy does its best to adjust. The tradeoff between capital and labor is adjusted.

 The tradeoff between utilization of domestic labor and foreign labor (outsourcing) is adjusted. Prices of goods are adjusted. Consumers adjust their buying preferences. And the ripples keep expanding. Eventually the ripples settle down. At the end of the day, what has changed? Recalling that the adjustments were due to an increase in the cost of domestic labor, it is clear that the following are inevitable:

 1. Employers will move towards greater automation (use more capital equipment and less domestic labor), leading to fewer jobs and more unemployment for low-wage employees

 2. Employers will engage in more outsourcing (since foreign labor is now more competitive) resulting in fewer domestic jobs and even more unemployment

 3. Prices of goods will go up (at least in the short term) with consumers able to buy less (further reducing jobs, increasing inflation, and lowering

our standard of living)

 4. Consumers will shift buying preferences away from labor-intensive goods … even more layoffs and fewer jobs

 5. Marginal manufacturers will go out of business, leading to even more unemployment

 6. Tax revenues will drop and unemployment costs will rise … if taxes are raised to make up for these problems, an even greater spiral of economic damage will ensue

 7. And of course, the Democrats will blame everything except their own policies. No one wins.

 If we really want to raise wages and increase the number of high paying American jobs, what should we do? The only way is to make the productivity of the American worker higher … make an hour of labor really worth more. That can only happen by permitting greater capital investment in the economy. It means lowering taxes and eliminating costly regulations, thus leading to greater retained earnings, increased incentives for risk taking, and higher investments in product development. It sure would be nice if we could just pass a law and be more prosperous. But only children could possibly believe that this would work. Is Mr. Kerry really that naïve? Are the voters?