Other People’s Money: The Minimum Wage


Steve Coll has a comment in this week’s New Yorker calling for a higher federal minimum wage. He points out that it’s awfully hard for a family of four to live on the current minimum wage, which would produce a family income of about $15,000 a year. That is certainly true, but Mr. Coll leaves out a few things. A family of four with an annual income of $15,000 would be eligible for food stamps amounting to $7584 and an earned income tax credit of $5372.

unemployment0_small Other People’s Money: The Minimum Wage

That raises the family income to $27,911, which is quite an improvement. The family would also be eligible for Medicaid, school lunch and breakfast programs, perhaps housing assistance and other forms of help. He also leaves out the fact that very, very few people earning the minimum wage are the sole breadwinners of a family of four. Most are entry-level employees, often teenagers, with no developed skills.  Most people who take a job at the minimum wage are earning above that level within a year, having learned marketable skills.

To be polite, Mr. Coll is being tendentious. To be less polite he is being grossly intellectually dishonest,

The minimum wage is a favorite liberal hobbyhorse, heavily promoted by labor unions. It is typical progressivism: a liberal politician (or journalist) says, in effect, “See that man over there? He needs help.” Then he points to an employer and says, “You, help him.” Finally, he points to himself and, addressing the man needing help, says, “Don’t forget where the help came from.”

But is the minimum wage a good idea?

Labor unions love it for a very simple reason, even though few unionized workers earn the minimum wage: labor contracts are often predicated on the minimum wage, with the bottom tier of workers earning 1.5 or 2 or 3 times the minimum wage. So if the minimum wage goes up, so do the wages of all the workers covered by such a contract. Labor leaders may shed crocodile tears for the poor and downtrodden, but what they care about—because that’s what they’re paid to care about—are their often well-paid workers.

Steve Coll points out that a higher minimum wage polls well, even among Republicans. But this sort of polling is junk polling, good only for producing rhetorical ammunition for the chattering classes, not judging real public opinion. The overwhelming majority of people don’t think deeply about matters of public policy, so asking the right question will always produce the desired answer. Even if the poll is honest it will elicit, at best, an algorithmic response not a considered judgment.

But marshaling the opinions of the self-interested and the ill informed is not much of a test for public policy. Does the minimum wage make economic sense? The answer is no. It’s price fixing (fixing the minimum price of labor) and price fixing is always economically pernicious. Set the price too low, and instant scarcity results, such as affordable housing in cities with rent controls. Set it too high and instant glut happens, such as with, well, the minimum wage. In economics, a transaction is, by definition, “an exchange of commodities between two parties, to the economic benefit of both parties.” If an employer has to pay $8.00 an hour in wages, he must get $8.00 an hour in work from the employee or he won’t hire him. Could that be a reason teenage unemployment right now is 22.7 percent and unemployment among black teenagers is 36 percent?

Is there a better solution for the few people who are working full-time, trying to support a family, on the minimum wage? Yes, and it’s been in place for the last forty years, the earn income tax credit mentioned above. It is a refundable tax credit for people earning less than a “living wage.” (A refundable tax credit is one that is paid to the tax filer even if his tax liability is zero.) If the wages produced by a free market are not sufficient to produce a living wage, the EITC supplements those wages until, as skill levels improve and wages thus increase, the wages paid produce a living wage. It incentivizes the unskilled to develop the skills needed to make a living on their own without distorting the free market and producing untoward results, such as horrendous teenage unemployment.

Of course, from the politician’s viewpoint, the EITC would have to come out of tax revenue, requiring either skimping on other types of spending, raising taxes or worsening the deficit. Any of those choices might imperil the politician’s re-election. Or, of course, the politician could find ways to operate the government more efficiently, freeing up the needed revenue.

But that last option would take hard political work. It’s a lot easier to be generous with someone else’s money, secure in the certainty that liberal journalists will carry the necessary water.



 About the Author:

John Steele Gordon,
  was born and raised in New York City. He attended Millbrook School and Vanderbilt University, graduating with a B.A. in history in 1966. He has been writing on business and economic history for over twenty-five years. He is the author of seven books. Among them are The Scarlet Woman of Wall Street, a history of Wall Street in the 1860s; Hamilton’s Blessing, a history of the national Debt; The Great Game, A history of Wall Street; A Thread Across the Ocean, the story of the laying of the Atlantic cable; and An Empire of Wealth, a history of the American economy. He has also written for numerous publications, including Forbes, Forbes ASAP, Worth, the American, National Review, Commentary, and the Weekly Standard. He wrote “The Business of America” column for American Heritage for eighteen years (many of the columns were collected into a book of that name published in 2001). He currently writes a column on business history for Barron’s called “The Long View.” He writes frequent book reviews for the New York Times and the Wall Street Journal, where he also contributes frequent op-ed articles.