Mr. President, you’d fail my class
Back in September, President Obama was asked how he thought he’s done when it comes to economic policy. Rather than fess up and admit his plan for economic recovery is not working, the president instead chose to punt by saying he’d give himself an “Incomplete” grade on fixing the economy. If the State of the Union on Tuesday night was any indication, his “Incomplete” grade should soon be revised to an “F.” In fact, in terms of his understanding of basic economics, we might as well already pencil in an “F” score: President Obama just doesn’t get it when it comes to economic principles, and his discussion of the minimum wage was a clear case in point.
More than 90 percent of economists think the minimum wages cause unemployment; (my guess is the other 10 percent of economists didn’t understand the survey question). The strong consensus among economists about the harmful effects of minimum wages isn’t high-brow theory. We have data, history, and common sense to back up our point, which means the president’s call for raising the minimum wage to $9 per hour contradicts some of the most basic teachings of economics.
At the most fundamental level, minimum wages are barriers standing in the way of free contracts. If a person wants to work for $4 per hour and an employer wants to hire him or her for $4 per hour, a minimum wage of $9 is blocking win-win exchanges from happening.
The worst thing about the minimum wage, though, is the following: the people being helped by the policy—unskilled, young workers receiving low pay—is the group most harmed by the law. College professors and high skilled managers do not feel many direct effects of the minimum wage. The harm from the policy is concentrated in people just getting started in their careers, people needing a chance, and people with few skills to bring to an employer.
The effect of the minimum wage on unemployment is quite evident when we look at unemployment data. Unemployment rates for teenagers are above 20 percent; rates for black males age 16 to 25 are also above 20 percent. Other minority groups, such as young Hispanics, are also harmed by the policy. The high unemployment rates for unskilled workers are not the result of differences in work ethic or a grand conspiracy against young people, but, rather, the straightforward consequences of hikes in the minimum wage.
When the minimum wage is increased, more people begin to look for work and employers are less inclined to hire workers. Together the two effects lead to a surplus of labor (i.e., unemployment). The employer is in the unusual position of having a large number of people all competing for the same minimum wage job. In a free, unfettered market, the pool of unskilled workers would compete by offering the employer their labor for lower wages. When the minimum wage blocks the labor market from clearing, however, the employer must use other means to sort through applicants: work experience, age, and race all become factors used by the employer in picking out a minimum wage employee. The aggregate effect is what we see in the data: high unemployment for young, unskilled adults and a huge disservice to millions.
The economics of the minimum age are basic and covered in the first few weeks of any introductory economics class. President Obama has a smart group of economists around him, and he, no doubt, has had the harmful effects of the minimum wage explained to him. Even though he knows the damage a hike in the minimum wage will do to young people, it seems he’s made the decision to put politics above good economics. In so doing, he’s chosen to play to people’s emotions instead of what’s the right thing to do from a cost-benefit standpoint. In choosing to put politics above principle, Mr. Obama deserves an “F” for integrity, but conversations about integrity are ones we can save for another day…
Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.