The Ugly Truth About the Minimum Wage Law

     by Jim Cox


At the urging of President Clinton, Congress is in the process of raising the minimum wage rate for the first time since 1989. The called for increase would move the minimum wage rate from the current $4.25 to $5.15 over two years. Opposition to any increase is on the grounds that any increase will put unskilled workers out of jobs. Just as a worker will only offer his labor time for a wage he finds beneficial, so an employer will only be willing to pay workers a wage that permits him to earn a profit. The higher the wage, the fewer workers the employer will employ. This is what economists mean when they invoke the law of supply and demand.

Unfortunately, there are hundreds of thousands of low-skilled workers and potential workers who will not find jobs at a higher wage rate (a local newspaper recently ran an article stating that there are 600,000 functionally illiterate adults in metro Atlanta alone!).

However, supporters of an increase do not accept this well-established economic view. Instead, they claim the increase is a way to provide a livable wage and to fight poverty.

But, the question must be asked: If raising the minimum wage from, $4.25 to $5.15 is so good for low-income people, why stop there? Why refrain from an even greater generosity, an even more livable wage, and an even greater fight against poverty? Why not raise the minimum wage to $10 or even $100 an hour, so everyone can be well-off!

This is no idle question. After all, the same reasoning that justifies an increase to $5.15--that Congress can generate prosperity through legislation--certainly also justifies an increase to $10 or more.

The reason politicians and other supporters of an increased minimum wage law don't follow their own argument to its logical conclusion is political, not economic.

Were the minimum wage raised this evening to $10 or more, millions of middle class working Americans would report to work tomorrow only to find that their jobs were no longer available to them. And they would know immediately that the new minimum wage law was responsible. Political heads would roll. If the nation avoided an outright citizens' attack on Washington, then, at the very least, those in office who supported the new minimum would find themselves soundly beaten in the next election.

The majority of politicians clearly understand this. While some politicians may genuinely believe that their efforts will help their constituents, this naive view is rare. The law of supply and demand cannot be repealed. Every increase has reduced employment at the lowest end of the pay scale. But the broad middle class of working and voting Americans has not been directly affected.

Studies suggest that for every 10 percent increase in the minimum wage, a minimum of 100,000 jobs are lost. A jump from the current $4.25 to the intended $5.15 is a 21 percent increase, amounting to over 200,000 newly unemployed. Other estimates would indicate a greater than 400,000 job loss.

But the vast majority of people adversely affected by the increase are either young, illiterate, or among the lowest ranks of the socio-economic ladder. They generally don't vote, don't work on political campaigns, don't contribute campaign money, don't write letters-to-editors, and don't otherwise make themselves heard politically. In short, these people just do not count in the political process. So politicians and special interests can posture as the saviors of these low-income people while actually destroying their prospects for attaining upward mobility.

This is the reality behind the feigned concern and compassionate rhetoric of politicians and other supporters of a minimum wage increase, and it is a very ugly reality, indeed.

About the Author: Jim Cox, author of The Concise Guide to Economics, is Associate Professor of Economics and Political Science and is Assistant Department Chair of Business Administration and Social Science at Georgia Perimeter College at the Gwinnett University Center, Lawrenceville, GA. He is a past President of the Georgia Association of Economics and Finance.