Obama Band-Aid: Raising minimum wage is not a viable solution

United States President Barack Obama has been arguing as of late for a minimum wage of $10.10 per hour, an increase from the current federal $7.25. He garnered support from a large number of economists in January, but on Friday he received opposition from more than 500 economists warning against a hike.

In an open letter to Congress entitled “A Statement to Federal Policy Makers,” the economists said that the president had good intentions but his solutions were “no silver bullet.”

Band-AidThe economists refuted the minimum wage hike as a solution to poverty and pointed to the high jobless rate and many exiting the workforce. The group of economists added that various approaches are need to a “serious, complex issue,” one that has been at the backbone of U.S. society since President Lyndon Baines Johnson declared a war on poverty during the 1960s.

Economists from all backgrounds signed the letter, including George Shultz, former secretary of State and Treasury under the Reagan administration. Nobel laureates Vernon Smith, Edward Prescott and Eugene Fama also penned the letter. It was noted that there weren’t any economists from the Austrian School.

“One of the serious consequences of raising the minimum wage is that business owners saddled with a higher cost of labor will need to cut costs, or pass that increase to their consumers in order to make ends meet,” they wrote. “Many of the businesses that pay their workers minimum wage operate on extremely tight profit margins, with any increase in the cost of labor threatening this delicate balance.”

They also cited the Congressional Budget Office (CBO) report that projected a $10.10 hourly wage would cost the overall economy approximately half a million jobs by 2016. “Many of these jobs are held by entry-level workers with limited experience or vocational skills, the very employees meant to be helped.”

The letter arrived as the Senate was debating the matter.

Mark Perry, an economics professor at the University of Michigan, published an op-ed piece for the American Enterprise Institute (AEI) in which he reiterated what the letter effectively warned: good intentions can lead to unintended consequences for the very people anti-poverty legislation is supposed to help.

“The tragedy of this well-intentioned, but misguided, legislation is that it would harm and disadvantage the very workers it is intended to help,” Perry wrote. “The 500+ economists who have signed the letter are in general agreement that economic reality and the laws of supply and demand are not optional, despite the arrogant attempts of economically challenged politicians and progressives to circumvent or disregard the most basic economic theory, economic laws and economic logic.”

According to a Bloomberg poll last week, more than two-thirds (69 percent) of Americans support the president’s proposal, including nearly half of Republicans (45 percent). Twenty-eight percent opposed it.

Opponents of minimum wage increases and the legislation itself regularly argue that it hurts the poor rather than assist. The minimum wage discriminates against the unskilled, uneducated, youth and non-union workers as businesses would opt for more qualified individuals since they’re mandated to pay a certain wage. Also, it leads to businesses slashing staffing levels and cutting hours.

Some economists further ask an array of questions, such as:

  • Why stop at $10.10? Why not $15, $20, $25, $50?
  • Where does the $10.10 figure come from? Is it based on some economic model or regression theory?
  • What happens to those who already earn the proposed minimum wage? Do they get a pay hike, too?
  • Murray Rothbard, a 20th century libertarian economist, labeled the minimum wage as “compulsory unemployment.”

“The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour,” stated Rothbard in “Making Economic Sense.” “This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.”