Two more reasons raising the minimum wage is a bad idea

Great post by Mark Perry of "Carpe Diem."

 

City	"Adjusted for Cost of Living Relative to Des Moines	Adjusted for Cost of Living Relative to New York City
Des Moines	$10.10 per hour	$4.12 per hour
Dallas	$10.72	$4.37
Milwaukee	$11.38	$4.64
Las Vegas	$11.49	$4.69
Miami	$12.00	$4.89
Minneapolis	$12.35	$5.04
Chicago	$13.15	$5.36
Seattle	$13.15	$5.36
Los Angeles	$14.67	$5.98
Boston	$15.68	$6.39
Washington, DC	$15.85	$6.46
San Francisco	$17.90	$7.30
New York City	$24.77	$10.10

Upon reflecting further about the minimum wage law
government-mandated wage floor that guarantees reduced employment opportunities for America’s teenagers and low-skilled workers during a conference at AEI today titled “Minimum wage or earned income tax credit: Which helps the poor more?” I thought of two reasons (in addition to many others) that a mandated price control in the form of a minimum is a bad idea:

1. Even advocates of the minimum wage can never provide any convincing, solid economic reasoning to support why a specific minimum wage is the “correct” or “optimal” mandated wage. One panelist today, a minimum wage proponent who signed this letter calling for a minimum wage hike to $10.10 per hour by 2016, expressed concern that $10.10 might be too high and he might be more comfortable with a mandated wage closer to $9 per hour.

But where does a minimum wage of $10.10 (or $9) per hour come from? Economic theory? Economic reasoning? Economic logic? Regression analysis? No. It comes from….. well it comes from….. OK, to be really honest, it’s just a made up number by politicians, with no basis in economic reality. Economists who are minimum wage proponents will try to justify the arbitrary number “picked from the air” by politicians and talk about inflation-adjusted comparisons to previous years or decades, like the inflation-adjusted high of a $10.66 per hour (in 2013 dollars) minimum wage in 1968. But why is that the “right” wage and the “right” year to use for comparison? It’s just another arbitrary minimum wage from another era.

Bottom Line 1: Minimum wage proponents can never satisfactorily answer the questions: Why is $10.10 the “correct” or “optimal” minimum wage? How did you arrive at $10.10 hour – what analysis was used? How do you know $10.10 per hour is the “optimal” minimum wage and not  $9.95, $10.15, $10.50, $8.50, $12.50, $4.00, $0.00 or $85 per hour? Does $10.10 per hour accurately account for all of the costs (reduced employment opportunities) and benefits (higher wages for some) of that specific minimum wage, and are those net benefits greater than all other possible minimum wages?

The very fact that minimum wages are ultimately completely arbitrary, and not based on any convincing, sound economic analysis, means they cannot really be taken seriously. Or at the very least, because they are mandated price controls that deviate from market-determined wages, artificially-determined minimum wages have to be distortionary.

2. Let’s suspend economic reality for a moment and assume that politicians (and some economists) can determine some optimal federal minimum wage, e.g. $10.10 per hour, that will universally apply to all 50 states and the thousands of cities within those. How can that federally-mandated minimum wage be the “correct” or “optimal” minimum wage for every labor market in all 50 states? Because of the wide variation in the cost of living across the United States, there is no way that a single minimum wage can possibly be optimal in every labor market in the country.

For example, the table above shows what the minimum wage should be in various cities around the country to be equivalent on a cost-of-living basis to a $10.10 per hour minimum wage in Des Moines (using BankRate’s cost of living calculator). The minimum wage would have to be almost $18 per hour in San Francisco and almost $25 per hour in New York City to afford a low-skilled worker in those cities the same standard of living as $10.10 per hour in Des Moines. Surely, a federally-mandated “optimal” minimum wage of $10.10 per hour can’t possibly be optimal for all cities in America, which vary widely in housing costs and other costs of living.

Bottom Line 2: Not only is a minimum wage of $10.10 per hour completely arbitrary, but it is completely meaningless because it’s not adjusted for the wide divergence in the cost of living around the country. Of course, many states have mandated minimum wages above the federal minimum wage, like New York (currently $8.00 per hour), but how can that be optimal and consistent for the entire state and every regional labor market?

Challenge: Even proponents of the minimum wage would have to admit that regional differences in cost of living and labor market conditions will mean that $10.10 per hour will be too high in some areas and too low in other areas, making it either meaningless or distortionary. In that case, if proponents of the minimum wage can somehow determine that $10.10 per hour is the “correct” or “optimal” minimum wage for the country on average, shouldn’t they further support thousands of individual minimum wages across the country that vary by city, based on differences in the cost of living and the unique supply/demand conditions in each labor market? That is, a single “optimal” minimum wage of $10.10 per hour can’t possibly be “optimal” for every market and is therefore ineffective unless adjusted on a city-by-city basis across the country.

Update: The table above now shows the minimum wage of $10.10 per hour adjusted for the cost of living relative to: a) Des Moines in the middle column as in the original post and c) New York City in the new column on the rights. Thanks to Warren Meyer (Coyote Blog) for his suggestion in an email:

I don’t think it is compelling to say that a minimum wage of $10.10 that might be right in Des Moines is too low for NYC due to cost of living. I would have written it the other way – a minimum wage that might seem OK to policymakers sitting in New York or Washington is way too high in Des Moines. I think this is more compelling because the problem of a price floor is not too bad if the floor is set too low, only if the floor is set too high. So what will seem like an appropriate minimum wage to east coast policy makers will look 2.5 times larger in the interior — which adds an interesting political dimension as it implies that most of the unemployment effect would be concentrated outside of the coasts and large urban areas, i.e. in red states."