On Tuesday, that familiar sound you’ll hear will be President Barack Obama delivering his fifth State of the Union speech. He’ll sound some familiar themes, such as income inequality, climate change, immigration reform — and the minimum wage.
But the laws of economics don’t change. A minimum wage hike was a bad idea when he proposed it in 2012, a bad idea when he repeated it in 2013, and it’s a bad idea today.
“When President Obama advocates a higher minimum wage in his State of the Union Address, he will no doubt argue that by increasing the minimum to $10.10, workers will have fatter pay checks and spend more, thus stimulating the economy and creating more jobs,” writes James Dorn of the Cato Institute. “In fact, economic logic tells a different story. The law of demand is more powerful than the minimum wage law: When the price of anything, including labor, goes up, the quantity demanded goes down, other things constant. No one has ever disproven this economic law — and neither the president nor Congress can overturn it.”
The argument Obama and others make is that consumption will rise. But that shows a poor understanding of economic principles.
“Proponents of the minimum wage argue that those workers who do retain their jobs will consume more, which will increase aggregate demand and increase GDP,” Dorn explains. “But that line of argument is a case of upside-down economics. Consumption is not a determinant of economic growth; it is the result of a prior increase in production. Workers cannot be paid what they haven’t first produced. A higher minimum wage — without a corresponding increase in the demand for labor caused by an increase in labor productivity (due to more capital per worker, better technology, or more education) — will mean fewer jobs, slower job growth, and higher unemployment for lower-skilled workers.”
Small business are the backbone of the American economy.
And small businesses will be affected most by an increase in the minimum wage.
“Small business owners will see their profits cut, which will either drive them out of business or slow their expansion,” Dorn writes. “If prices are increased to offset the higher minimum wage, consumers will have less money to spend on other things. Thus, there will be no net increase in employment.”
There’s historical proof, Dorn adds.
“Hong Kong grew rich without a minimum wage because it undertook the reforms that fuel growth: free trade, low tax rates, limited government, a stable rule of law that safeguards private property, sound money, and low costs of doing business,” Dorn writes. “The United States should do likewise.”
If Obama truly wants to address income inequality, he could do so by ensuring businesses can create more jobs and hire more people. A job is the real ticket out of poverty.
“It is the surest path toward greater income mobility as younger, low-skilled workers get experience and move up the income ladder,” he writes. “Cutting that ladder off by mandating a higher minimum wage is a recipe for poverty not progress.”