Should we abolish the minimum wage?

April 4, 2014
Cafe Hayek
Russ Roberts

Last night, as part of the Intelligence Squared series Jim Dorn and I debated Jared Bernstein and Karen Kornbluh on whether we should abolish the minimum wage. When the audio is available, I’ll link to it. In the meanwhile, here, plus or minus a few ad libs, are  my opening argument and then my closing argument. We were given six minutes for the opening and two minutes for the closing. I pretty much used all 480 seconds. At the bottom of this post, I add two caveats about one of my arguments.

My opening argument:

We need to abolish the minimum wage. There is only one argument that matters–the moral argument. Does the minimum wage make the world a better place, especially for the poorest workers and their families?

Those Americans with the least education and lowest skill levels have struggled tremendously over the last few decades. They find themselves in competition with machines and foreign workers. Their job opportunities have shrunk. Their standard of living is mediocre at best.

The minimum wage is the wrong way to help these workers. It attacks the effects of economic change rather than the underlying causes.

You don’t need a special theory of the labor market or a degree in economics to understand that making workers artificially more expensive makes it harder for them to find work.

Those who support the minimum wage will tell you the MW gives needed bargaining power to low wage workers. Yet it helps very few people directly.

95% of those paid by the hour earn more than the minimum wage.

That includes my cleaning lady who earns more than double the minimum wage. Surely she should have little bargaining power. Her English is imperfect. No union protects her. Yet I pay her much more than the legal minimum. I like to think it’s because I’m nice. But I know better. If I don’t pay her around $20 an hour, she won’t show up. She has too many alternatives.

Alternatives force employers to treat their employees well.

For most of us, legislation isn’t necessary.

But the minimum wage does boost the salaries of those at the bottom especially young workers. About 1.7 million workers between the ages of 16-24–about half of all minimum wage workers–get a raise because of the minimum wage. And others with wages just above them also get a boost.

But those artificially higher wages discourage employers from hiring other low-skilled and inexperienced workers. This is particularly tragic when the unemployment rate among young workers today is over 16% and over 29% for young African-Americans.

Many who support the minimum wage argue that somehow, you can raise wages artificially and there will be no effect on employment. But who believes that employers don’t respond to higher wages? That’s why employers replace workers with machines. That’s why they send jobs overseas That’s why manufacturing employment is falling. Why would artificially increasing the wage of low-skilled workers have no effect?

Consider my favorite exemption to the minimum wage–the internship. You’re allowed to pay less than the minimum as long as it’s zero.

Do you think making internships illegal would increase the number of opportunities for young people to get experience? Do you think forcing employers to pay the minimum instead of zero would help young people?

Others justify the minimum wage saying the employment effects are small. Small? When you lose your job or can’t find one, the effect isn’t small. It’s 100%.

So it’s nice to give 1.7 million young workers a raise. But what about the 3.4 million unemployed young workers as of last month, workers actively looking for work who can’t find it? Is it worth it?  Is it worth helping those 1.7 million people if it means making it harder for twice as many people to find any kind of job? That’s over 3 million people earning zero. I reject making that tradeoff. It’s a bad bargain.

The irony of the minimum wage is that it reduces the bargaining power of workers and makes them easier to exploit. It increases the number of workers trying to find work while reducing the number of jobs available. That encourages low-skilled workers to stay in lousy jobs where employers treat them badly. If they quit, they know the odds of finding another job is very small.

The best argument for the minimum wage is that our school system is a failure. So we have to do something to help people who have been abused and betrayed by the system. But the minimum wage is the wrong way to fix this failure. It’s just an additional barrier to the least skilled workers of America making it harder for them to begin their careers. Do we really want to make it harder for the least-skilled with the fewest connections, the ones who desperately need that first job to start their career? I beg you to consider that the best intentions don’t always lead to good results. Abolish the minimum wage and let young people and the least skilled have a better chance of getting the experience they need to thrive and prosper.

My closing argument:

In September of 2011, the governor of American Samoa traveled 7000 miles to testify for 5 minutes before Congress. He begged Congress to stop increasing the minimum wage in American Samoa–a process that had begun in 2007 and was scheduled to increase until the minimum wage in American Samoa reached the US minimum of $7.25. In 2009, employment on American Samoa fell 19%. That’s because employment in the tuna industry–1/3 of total employment on the island–had fallen 55%. The governor blamed that collapse on the minimum wage. Here’s a quote from the governor’s testimony:

We are watching our economy burn down. We know what to do to stop it. We need to bring the aggressive wage costs decreed by the Federal Government under control.  

Our job market is being torched. Our businesses are being depressed. Our hope for growth has been driven away…Our people live in the middle of the South Pacific Ocean, with no place to seek refuge in any economy other than our own.

Our question is this: How much does our government expect us to suffer?

I have the same question for those who support the minimum wage here in the United States. How much do you expect the least skilled among us to suffer?

Congress stopped increasing the minimum wage in American Samoa. They should have the same compassion for workers in the United States and abolish the minimum wage here.

Right now, there are people within a few blocks of where I am standing who cannot find work, simply because their skills are not worth $7.25 an hour. Why would you condemn those men and women to a wage of zero? Why would you cut off the bottom of the economic ladder and deprive a human being the chance to begin a life of honest work?

There are desperate people among us, people who have nowhere to turn, whose job prospects are poor. Why make their lives worse? It’s not just about the money. It’s about giving people a chance to find meaning and satisfaction from standing on their own two feet. Give the least skilled among us the chance they deserve. Abolish the minimum wage.

Two caveats: I argued that the minimum wage helps 1.7 million workers 16-24 years old get some kind of raise above what they otherwise would get without the minimum wage. But the cost is that it makes it harder for the 3.4 million young workers to find work. This was an elegant but inaccurate rhetorical flourish. Elegant, because 3.4 million (the number of unemployed 16-24 year olds in February of 2013, the most recent data) is exactly double the number of minimum wage workers 16-24 in 2012, the most recent data for minimum wage workers.

But it is not accurate. Just about 1/3 of all workers who earn less than the minimum are in food service. So their salaries are less than the minimum but they get tips which puts many of them above the minimum and many of those are 16-24. So the minimum wage probably helps a lot fewer than 1.7 million workers. But not all of the 3.4 million unemployed are hurt by the minimum wage. Many of them have enough skill and education to make much more than $7.25 and they are unemployed for all kinds of reasons unrelated to the minimum. In 2012, for example, 78% of teenagers (16-19 year olds) earned more than the minimum. More on these issues in another post coming soon.