Part 3: Maximum obtuseness

There’s a better alternative to the minimum wage.

by Derek Olson

In the first two parts of this series, I discussed the fundamental flaw of raising the minimum wage: It increases unemployment. Secondly, I explored how a strong body of empirical evidence confirms this. While there are some notable studies that do not find disemployment effects, the theoretical rationales are extremely dubious. Despite all this, pundits and editorial boards perform pseudo-intellectual dances to skirt around this fact. Before moving on, letâÄôs take one last glimpse at those effects. ItâÄôs true that businesses could raise prices instead of cutting labor to compensate for an increased minimum wage. Economists David Card and Alan Krueger believe this to be the case. Card and Krueger are most famous for advancing empirical work that contradicted the standard job loss theory. But what is the effect of increased prices? Increasing the price of a good or service reduces the demand for it. If restaurants raise prices, they will have fewer customers, which in turn means fewer cooks, fewer waiters and fewer busboys. Once again, the disemployment effect shows up, but to the data, it would appear that restaurants are cutting jobs in response to changing demand. In reality, the change is the increased minimum wage. Aside from raising prices, a quick look at employers of low-wage earners shows potential for mechanization. Instead of paying four human cashiers, the CVS in Dinkytown has four machines that allow for self-checkout and likely require only one employee to supervise them. If the minimum wage is increased, the McDonaldâÄôs across the street could follow suit by replacing human cashiers with touch screens that ask customers, âÄúWould you like fries with that?âÄù Only the myopia of stubborn ideology could dismiss this possibility. In fact, many restaurants at the Minneapolis-St. Paul International Airport have already implemented this technology, placing iPads at each table to take orders. When automation like this happens naturally, the result is economic growth, because cheaper automation reduces consumer prices. When automation is cheaper because laws artificially increase labor costs, the result is increased unemployment. When left-wingers are finally ready to admit that the minimum wage harms the workers it intends to help, we can have a real discussion. The truth is that that discussion would be quite short. The minimum wage doesnâÄôt work. OK, letâÄôs move on to something better. Fortunately, there is at least one superior policy we should be talking a lot more about: ItâÄôs called the Earned Income Tax Credit. A form of negative income tax, the EITC reduces taxes for low-wage earners, even if they donâÄôt owe any taxes. Instead of low-wage earners paying taxes on what they earn, the government pays them for working. Economists from across the political spectrum believe itâÄôs an effective tool in raising the welfare of low earners. ItâÄôd be easy to find bipartisan support to expand the EITC, if only politicians would quit slinging mud over the unavailing minimum wage. Another effective solution for low-wage earners would be to reform payroll taxes, which are noticeably regressive. If we find ourselves living in an alternate universe with an entirely different set of economic laws, we can return to discussing the minimum wage. In the universe we live in, supply and demand are not optional realities. The economy is a lot like Mother Nature. We canâÄôt cut down an entire forest without an adverse impact on the environment. And we canâÄôt meddle so carelessly into the economy with wage laws that have negative consequences.