The minimum wage is in the news once again. Despite having taken sides on this issue (I’m opposed), I’m increasingly of the opinion that the minimum wage is an almost entirely symbolic matter for both sides.
The minimum wage is obviously symbolic for its advocates, especially the politicians who back minimum wage hikes. It’s a relatively cheap way for them to say, “I’m on the side of the poor and downtrodden.” But informed advocates almost certainly know that the minimum wage is a lousy way to help the poor even if the disemployment effect is small or nonexistent. It’s simply not well targeted to help who it’s supposed to help. Many of the beneficiaries are teenagers, sometimes from reasonably well-to-do households, not single moms trying to support families. It doesn’t distinguish between sole wage earners and members of multi-income households. If you really wanted a policy that helps those who need it, you’d create a means-tested transfer program or expand the EITC, not go mucking around with market wages. But the minimum wage is appealing politically because it’s easy to understand (let’s pay people more!), and to the public at large – which doesn’t see or understand the trade-offs – it sounds like either a pure free lunch or a simple transfer from rich firms to poor employees.
But the minimum wage is also symbolic for its opponents, myself included. The best evidence indicates that the disemployment effects of the minimum wage, while real, are probably small. Since most people already earn more than the minimum wage, not that many people are actually affected. Apparently the demand for labor is relatively inelastic, since a 10% increase in the minimum wage results in a decrease in employment (of the relevant group) of only 1% to 3%. One likely reason for the small impact is that employers probably adjust other aspects of the job package, such as cutting free meals or requiring employees to clean their own uniforms. This is not great news, but it’s not terrible, either; it means that most affected workers are probably just getting a slightly less desirable compensation package, trading away some small benefits for a modest increase in pay. As bad policies go, my guess is the minimum wage is one of the more innocuous. Our efforts would be better spent fighting more disastrous policies. So why do we spend so much time on this one? Because the minimum wage is a classic, straightforward example of how ham-handed government intervention in the free market yields unintended and harmful results. Government-set wages cause unemployment! Yeah yeah, the harms (and benefits) are probably small, but that’s not the point. The point is that if we can get people to see how even this very popular policy is crummy, maybe they’ll begin to question the wisdom of other interventions whose bad consequences are more difficult to grasp. So the issue is just as symbolic for free marketeers as it is for the interventionists.
That said, I should note that large increases in the minimum wage will of course produce worse consequences, and the currently proposed increase from $5.15/hour to $7.25/hour – a more than 40% increase – might therefore be cause for real concern. So maybe this time around the debate is more than symbolic.