Democrats endorse $12 minimum wage. Is that a good idea?

Democrats endorse $12 minimum wage. Is that a good idea?

The increase in the minimum wage would result in slightly higher prices overall, but much higher prices for small business and companies in the fast food industry.

WASHINGTON, Nov. 4, 2015  – Last April, the Democrats in Congress introduced a bill to raise the minimum wage to $12 per hour. Tuesday, presidential nominee Hillary Clinton came out in support of the $12 minimum wage.

The minimum wage bill is strongly supported by virtually all Democrats.

Writing in the New York Times, Princeton University economist Alan Krueger argued that $12 is the right level for the minimum wage. Is it?

Presidential candidate Hillary Clinton has a long history of supporting increases in the minimum wage. She advocates that every hard-working American should earn a livable wage. The American public overwhelmingly supports raising the minimum wage although most polls indicate the public favors a $10.10 minimum. The polls also show between 70 and 80 percent of voters favor the increase.

The public’s strong support probably stems from the great compassion that Americans feel toward other Americans. Unfortunately, the economics indicate that raising the minimum wage to $10 or $12 or $15 will do more harm than good for the vast majority of people.

Why then do so many learned economists favor the increase?

Why Big Business loves minimum wage increases

At colleges and universities economics is taught as either a social science or as part of the business curriculum. That’s really where the differences originate. Economists like Nobel Prize winners Paul Krugman and Joe Stiglitz and respected economists like Alan Krueger view economics with a social justice perspective. Their goal is to modify market conditions to cure perceived social injustices, like wide income inequality.

They argue that, if someone works hard for 40 hours per week, he should earn a livable wage regardless of the skills he has or the output he produces. In other words, suppose an unskilled worker were hired to dig holes and fill them up again. No matter how hard the person worked, the value of the output is zero.

In our system an individual is paid according to the value of the output. Socially oriented economists seem unwilling to accept this. If they understood business they too would not favor an increase in the minimum wage. The reality, regardless of what their skewed studies may conclude, is that increasing wages far beyond the value of the output of labor leads to a reduction in employment.

The reason is easy to see. Suppose the minimum wage were raised to $15 per hour. Working 40 hours per week, 52 weeks per year would mean the annual wage paid would be over $31,000 per year. Add the 6.1 percent that employers must pay for social security tax and the $3,000 penalty that the firm will pay if health care is not offered, and the total becomes over $36,000 per year for a worker with absolutely no skills.

Even at $12 per hour, the annual cost is nearly $30,000 for a worker who essentially cannot perform any task without being trained. The result would be a tremendous job loss, likely increasing the teenage unemployment rate from the current level of about 20 percent to at least 30 percent.

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Krueger cites some work by prominent economists, including himself, which says a “moderate” increase to $12 per hour “would cause little or no job loss.” These socially oriented economists simply do not understand business principles. In fact, their flawed studies use time periods when an expanding economy led to job increases, in spite of small increases in the minimum wage. The reality is that job gains would have been much larger had the minimum wage not been increased.

Social economists are trying to “Gruberize” the results of their studies, which means they tailor the data and time periods studied to show what they intend to prove rather than taking an objective unbiased view to see what the true conclusions should be.

The increase in the minimum wage would result in slightly higher prices overall, but much higher prices for small businesses and companies in the fast food industry. It also could reduce corporate profits, thereby putting downward pressure on economic growth. And it would encourage the replacement of labor by capital goods so that we would order our food at restaurants on a touch screen rather than from a server.

Compassionate Americans should be given all of the facts in an unbiased manner so that they can reach valid conclusions. By attempting to cure perceived social injustices, social economists advocate policies that hurt exactly the people they are trying to help.

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