fedgazette

Minimum wage as price support

Amid calls in Congress for an increase in the minimum wage, the fedgazette presents two opposing views, an editorial from the Minneapolis StarTribune in favor of such a raise and an editorial from a Minneapolis Fed economist in opposition.

Preston J. Miller - Former Vice President and Monetary Adviser

Published October 1, 1999  |  October 1999 issue

Although the StarTribune and I disagree on minimum wage policy, there is a lot on which we do agree. For instance, we seem to agree that the minimum wage is a flawed policy tool. We also seem to agree that government intervention in labor markets is justified only to correct market failures. Where we disagree is that the StarTribune takes the relatively low wages of unskilled labor to be evidence of a market failure. In contrast, I take the relatively low wages to be evidence of a well-functioning market.

I find the StarTribune's position to be puzzling. Just weeks earlier, it published an insightful editorial arguing against crop price supports. The editorial pointed out that while grain farmers were suffering from low prices, the prices reflected an overabundance of supply, due to a fall in foreign demand. The editorial concluded that price supports would lead to great waste, because they would encourage more production of the crops in abundance and discourage farmers from planting crops that are more in demand.

But minimum wages are simply price supports for unskilled workers. The market is telling us that there is an overabundance of unskilled workers and a relative shortage of skilled workers. A wage differential between the two classes of jobs is required to encourage people to acquire the skills to make the move from unskilled to skilled. A higher minimum wage, like crop price supports, encourages too much of the "good" in overabundance (unskilled labor) and too little of the "good" in need (skilled labor).

Some may say that at least the StarTribune wishes to help low-paid workers. So do I, except I believe that you help them by helping them help themselves. That is, we need to encourage them to get the education and skills required to make them productive, high-paid workers. We do not help them by discouraging them from seeking improvements in their job skills.

Currently on leave from the Minneapolis Fed, Miller is working with the Congressional Budget Office in Washington, D.C. See Miller's essay in the September 1999 Region magazine for more on the minimum wage.

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