The guest editorial is a new Region feature in which
authors are encouraged to share their thoughts on current economic policy
issues. The Region will consider unsolicited submissions
A higher minimum wage has been proposed by the president, and
it is sure to be passed into law by the Congress. The minimum wage
is expected to be raised over two years from the current $5.15 an
hour to at least $6.15 an hour. What a shame! This is bad policy.
Critics of the minimum wage commonly maintain that, when it is
effective, it raises the cost of labor and lowers employment. Moreover,
they cite statistics that suggest well over a half of the beneficiaries
of a higher minimum wage are not members of low-income families.
While I agree with these criticisms, I am against the minimum wage
policy for a more basic reason: It interferes with the operation
of a well-functioning market.
If recent global economic developments have taught us anything,
it is that free markets work well and messing with them can be extremely
costly. A large share of the blame for the Asian financial crisis
goes to government interference in the banking and financial sectors,
which led to an excessive amount of credit that was inappropriately
allocated. A large share of the blame for the high unemployment
rates that prevail in Europe goes to governmental interference in
labor markets, such as high minimum wages and policies designed
to protect jobs-all of which make hiring employees more expensive
to employers. In contrast, the United States has performed wonderfully,
whether we refer to financial markets, labor markets, output or
prices. Much of the success is due to our letting markets work.
The United States has been a leader in developing and using a
plethora of new technologies, and the nation has taken advantage
of these technologies by letting the private sector adapt to them
in an almost unfettered way. The private sector determined where
new investment money should be directed, what form of industrial
organization would best make use of the new technologies and how
workers should be shifted out of industries using obsolete technologies
and into industries using the new technologies.
The dynamism in U.S. labor markets has been amazing. Each week
on average in the current recovery and expansion period, roughly
350,000 workers have been separated from their jobs, while roughly
400,000 job seekers have found new ones. This process of job destruction
and job renewal (a process Cox and Alm call "churning") has allowed
workers to be moved to where they are most productive-that is, to
industries producing or using the new technologies. In the last
few years, employment growth in industries producing information
technology has more than doubled employment growth in all industries.
An important beacon to guide people seeking employment comes from
the behavior of wages. Jobs related to new technologies tend to
be highly productive and thus tend to pay high wages. For instance,
the average salary for employees in industries producing information
technology is nearly double that for all private employees.
Over the last decade or so, the structure of wages has sent a
loud and clear message to Americans of all ages, but especially
the young: Stay in school, acquire skills. That is because the reward
for education and skills has risen at the same time that inflation-adjusted
pay for high school dropouts and the unskilled has fallen. Most
economists agree that the main reason for the change in wage structure
has been the steady adoption of new technologies. These technologies,
such as computers and robots, have substituted for lower-skilled
and less-educated workers, while creating a greater demand for their
operators, the more highly skilled and educated.
My case against a higher minimum wage is that it distorts the
labor market's signals. A falling wage for lower-skilled and less-educated
workers is saying that the economy needs fewer of these workers.
In contrast, a higher minimum wage encourages more people to take
the jobs covered by the minimum wage and so perversely increases
the supply of such workers. Similarly, a rising reward to acquiring
skills and education encourages students to stay in school. On the
other hand, a higher minimum wage encourages students to take low-level
jobs and thus not acquire more skills and education. In an empirical
study for the United States, Neumark and Wascher found that a higher
minimum wage very significantly increases the number of high school
Some will say, this free market argument is fine in the abstract,
but what about the ones left behind? Not everyone is capable of
getting a college degree or becoming a programmer. That is true,
but it is a problem that the market can solve, and is solving. Those
who have the ability and desire will acquire the skills and education
required so they can reap the rewards the market is offering. But
as more acquire skills and education, those who cannot or do not
desire to travel this path will find that their ranks have thinned.
That is, the supply of workers with low skills or education will
shrink, and a smaller supply will drive up their wage. This is,
in fact, happening. Over the last year in the United States, the
number in the civilian population with less than a high school degree
has dropped by over 1.5 million, while the number classified as
in the labor force with a college degree has increased by over 2
million. Meanwhile in Minnesota's Twin Cities of Minneapolis and
St. Paul, where the supply of low-skilled and less-educated workers
has been very tight, the starting wage for such employees is reportedly
well above the mandated minimum wage. The market without any government
interference is raising all boats.
So, the message is clear. The labor market is working. It is allocating
labor in an efficient way. Don't mess with it. If the public desires
to aid low-income families, don't do it by distorting market wages.
Just give them money in more direct ways.
Preston Miller is currently on leave from the Minneapolis Fed,
while he lends his expertise to the Congressional Budget Office
in Washington, D.C.
Cox, W. Michael, and Alm, Richard. 1999. Myths of Rich and
Poor: Why We're Better Off Than We Think
. New York: Basic
Neumark, David, and Wascher, William L. 1995. Effects of Minimum
Wages on Teenage Employment and Enrollment: Evidence From Matched CPS
Surveys. Working Paper 5092. National Bureau of Economic Research.