WASHINGTON, May 21, 2015 – A May 21 editorial in the New York Times notes that Los Angeles has just agreed to raise their minimum wage to $15 per hour. This is “all good” according to the Times. While a reader can certainly understand the NYT editorial view desiring to correct a perceived social injustice, the Times’ apparent lack of understanding of economics is somewhat baffling.
The editorial notes, for instance, that opponents to an increase in the minimum wage say that the higher pay will lead to layoffs and business closing. This position makes sense to the vast majority of unbiased economists. Why?
A basic economic principle says that if the price (wage) of something rises, the quantity demanded (number of jobs) will fall. Also, if wages are too high, business profits will be squeezed and some businesses may be forced to close, particularly small businesses. Additionally, as wages rise, especially for unskilled minimum wage workers, there is a tendency to replace labor with capital, so that customers of fast food restaurants will order by a touch screen rather than from a person.
The NYT says exactly the opposite. They say the added cost is offset by “improved productivity.” This is pure poppycock. Giving a worker a raise without having the worker produce any more output to earn the raise will result in a decrease in productivity, not an increase.
In other words, if a worker produces more and then earns more, there is an incentive to keep producing more. If a worker produces nothing more, but is still paid more, then there is an incentive to produce nothing more. It’s that simple.
The NYT goes on to say that the increase in prices from the higher labor cost is not “measurably disruptive.” That may be true, but it still has to be paid for by the consumer.A spike is gasoline prices may not be disruptive, but it has to be paid. Besides, the Times argues, the increase in wages can be covered by “paying executives and shareholders less.”
Basic economics says that if you pay the executives, who make the greatest contribution to the firm’s profit, less, they may leave the company to find an opportunity where then can be paid according to their market value. The company could lose highly skilled and very productive employees.
Shareholders are mostly investors who look to buy ownership of a publicly traded company. As such they share in the profit of the company and they anticipate that the value of their shares will increase as the firm grows. There are thousands of publicly traded companies in the US.
In making the investment decision, an individual weighs the perceived risks against the anticipated return. As the return decreases, because the NYT says stockholders should be paid less, the investor looks to purchase another stock where the return in not less. The result is that companies that reduce the return to shareholders and reduce the compensation to executives will eventually seek a loss of key personnel and a loss of capital, which could put the firm in a difficult no growth position.
Finally, the NYT praises what is likely the most harmful of minimum wage actions.That is indexing the minimum wage to inflation so that the minimum rises every year. Over time this will put the minimum wage at such a high level that serious problems will result. Among them will be a near impossibility for new small businesses to form, the acceleration of automation to replace very expensive unskilled workers and a flight of some businesses that rely on unskilled labor, out of the area toward places where labor is paid according to the value of the output rather than set by politicians.
It is certainly understandable that editors express their views. In fact, in our Democracy we should always welcome healthy debate. But when support for a position comes from a biased look at reality that the author knows is not really true, a huge disservice is being done. It is generally well known that the editors of the NTY mostly favor positions that will correct a perceived social injustice. Wouldn’t it be better if those positions could be supported by an objective view of the facts?