It is a fundamental economic law that pricing the services of any product above its market clearing price will create a surplus for that product. It should therefore be a self-evident truth that this economic law applies to labour with equal force. Regardless of what a many people think, labour is not special nor is it bought and sold. What employers actually do is pay rent to labour for the use of its services. How much rent must be paid for those services depends on the supply of labour and the value of its marginal product. The lower the supply (given an unchanged demand) the higher will be the wage, and vice versa.
The demand curve for labour consists of a descending array of marginal productivities. The point at which the wage rate is determined is where we find marginal workers, those it only just pays to hire. It is at this point that minimum wage laws* do their damage. These workers are the first to go when the effective minimum is raised. It follows that what really matters is not the minimum wage per se but the effective minimum rate, the rate that exceeds the market clearing price of labour. Hence it is this rate that causes unemployment.
It should therefore be clear that if the minimum wage is fixed at or below the market rate no unemployment will appear. When this happens the public can usually be persuaded that raising the minimum wage will raise the standard of living for these workers without creating unemployment. That the general public can be conned into buying this snake-oil is, unfortunately, to be expected. Equally unfortunate is the fact that there are ideologically motivated ‘economists’ who enthusiastically promote this dishonest and destructive policy.
Laura Dresser, a University of Wisconsin professor of labour economics and associate director of the Center on Wisconsin Strategy (COWS), a leftwing front, is one such ‘economist’. The argument goes that when the lucky beneficiaries of Dresser’s generosity spend their additional incomes this will generate a “boost in economic activity”. This extra spending will then create more jobs. (Nancy Pelosi said the same asinine thing about dole payments). Naturally, her comrades in the ‘Democratic’ Party were jubilant at the good news. Once these self-appointed tribunes of the downtrodden had wiped away their tears of joy one of their spokesmen, State Senator Bob Wirch, then self-righteously denounced those heartless Republicans, i.e., people who think it’s immoral to deliberately price people out work, as “a bunch of extremists”.
Let us examine in detail the thinking behind Laura Dresser’s phony economics. This leftwing activist is politicising and rationalising vulgar Keynesian reasoning. She emphatically asserted that raising the state’s minimum wage would increase aggregate spending, which implies that it would also raise government revenue. What a trifecta! Raising the effective minimum would increase tax revenue, raise the demand for labour and promote economic growth. (I have it on good authority that Dresser also writes fairy tales under the pseudonym Easter Bunny).
The ridiculous implication of Dresser’s argument is that those who hire marginal workers are selfishly accumulating ever-mounting piles of cash. Hence, transferring these idle cash balances to minimum-wage workers would increase total spending which would generate more jobs. Utter nonsense, employers have to spend just as their employees have to spend. The difference being that a great amount of an employer’s revenue is spent on inputs, particularly wages.
Moreover, the idea that transferring income from one group to another boosts aggregate spending should be self-evidently absurd. Taking money from A and giving it to B cannot raise total spending: it merely reduces A’s income by the same amount that it raise B’s income. John Stuart Mill expressed the classical view perfectly on this matter more than 170 years ago when he wrote:
It is no longer supposed that you benefit the producer by taking his money, provided you give it to him again in exchange for his goods…. that the man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman’s fortune1.
Of course, Dresser could use the old Keynesian standby that as these employers save part of their incomes while marginal workers save nothing, then boosting the minimum wage will raise spending by reducing savings. No it won’t. This fallacy contains even more fallacies. To begin with it assumes that to save is not to spend. But saving is spending by another name and is the means by which spending is directed from the purchase of present goods to the purchase of future goods. (I should add that Keynesians are forever confusing cash balances with savings).
Entrepreneurship drives economies and savings fuel them. Without savings there can be no investment (the purchase of future goods) and that means no growth and therefore no increase in the standard of living. Even competent Keynesians admit that growth is forgone consumption, meaning that current consumption is sacrificed in favour of greater future consumption. Therefore consumption comes out of production.
If Dresser and her fellow travellers are right then why stop with a ‘modest’ increase. Why not make it $25 an hour or even $100 an hour. According to her logic (I would never dream of calling it economics) this would boost consumer spending by a huge amount and send the state’s growth rate into orbit, not to mention the demand for labour. With one stroke of the pen Wisconsin could lead the United States if not the world in economic growth. The calculating Dresser knows full well that a $25 wage hike would be catastrophic for employment, even though it is the logical outcome of her own argument. This is why she tried to forestall criticism by disingenuously stating that
I don’t want to create the impression that you would get this consensus on any increase of the minimum wage…. The simple truth is that nobody is raising the wage to $25 or $100 an hour.
So how does she know her proposal will have only beneficial effects? Because a study that she and her pals conjured up said so. This is like buying a judge and still rigging the jury. If this so-called economist is correct in that her minimum wage would not destroy jobs then economic theory tells us that there must be a labour shortage among Wisconsin’s young adults, which means that employers would be bidding up wage rates. But the state’s high rate of youth unemployment tells us that the reverse is true. So how does she explain this situation? She doesn’t and Wisconsin’s phony media is not going to demand that she do so.
Laura Dresser’s minimum wage proposal is at heart a redistributive policy. What she and her lefty chums refuse to publicly admit is that it would effectively redistribute income from those whose jobs the new effective minimum wage destroyed to those who get to keep their jobs. But playing roulette with the lives and well-being of people is something leftists live for.
When it comes to leftists I have learned to never attribute stupidity to their actions when those actions can be just as easily explained by malice.
*The real minimum wage is not the statutory rate but that rate combined with mandatory costs of hiring labour. For example, if a government mandates healthcare costs that add 10 per cent to the cost of hiring minimum wage workers then the minimum rate the employer must pay has been effectively increased by 10 per cent.
1John Stuart Mill, Essays on Economics and Society, University of Toronto Press, 1967, p. 262.