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Column: Running the numbers on minimum wage

A few days ago we learned that 80 percent of the U.S. population will spend some part of its life in poverty. We also learned that more than 100 percent of the income growth in the past five years went to the top 1 percent of income earners; that is, they gained while the rest of the country lost ground.

President Barack Obama, asserting the dignity of work and the pride that workers derive from having a job, called for increased efforts to address the worsening income disparity. He proposed an increase in the minimum wage from $7.25 to $9 per hour; meanwhile, protesters in several cities were demanding a "living wage" of $12.50 per hour — a wage that would lift workers to the federal poverty level if they worked a full schedule of 2,000 hours per year.

Proposals to raise the wage rate above what market forces dictate can be expected to generate strong business opposition. Even firms that advertise high-quality employees providing excellent customer service resist being forced to pay higher wages, often claiming that the market-determined wage is fair because it pays workers what they are worth.

Accordingly, Walmart is threatening to cancel three planned stores in the District of Columbia if they are forced by the city to pay $12.50 per hour. Home Depot and the U.S. Chamber of Commerce are also actively challenging living-wage initiatives.


While recent statistical analyses have shown that small increases in the minimum wage have little negative impact on job availability, the changes now being proposed are quite large. For example, the president's proposal is for a 24 percent increase; the living-wage plan, 72 percent. Such large increases in the cost of labor raise the incentive for profit-seeking businesses to substitute equipment for people and possibly move jobs to lower-wage countries.


Are the proponents of higher legal minimum wages correct when they assert that wages understate, often by a large amount, the total value of the work performed? More than 200 years ago, Adam Smith and David Ricardo demonstrated that while the value of goods and services exchanged in markets can be very high, their prices would be driven low if their supply were abundant.

Using water to illustrate a good with price demonstrably far below value, Ricardo explained that all goods and services have greater value than their price; and all workers produce value greater than the wages they receive. Prices and wage rates measure only the value of goods and services as they are being exchanged for money, not their value in use.

The excess of value over price is a surplus (gain) received in the course of buying the goods or service. Because surpluses are tied to purchases, those with more disposable income will buy more and in turn receive more of the associated surpluses. If market wages are the sole reward for work, then the net gain of low-wage labor will automatically be redistributed up the income strata.

In the debate over increasing legal minimum wage rates, two market outcomes should be kept in mind: Wages underestimate the value of the work being performed, and significant increases in the legal minimum wage may have the unintended consequence of reducing employment.


How can we enhance low incomes while permitting market forces to determine employment and wage rates?

One way is to provide public goods such education, health insurance and transportation, improving the lives of low-income people and enabling them to get to work in better health and, once there, better able to apply greater skills.

A second way is to redistribute cash. Milton Friedman and Ronald Reagan, staunch adherents of market economics, advocated using the tax system to supplement low-wage work. During the Reagan administration, this redistribution was implemented through the earned income tax credit, which reversed the flow of taxes for low-income workers: Instead of paying into the tax system, these workers received payments from it in proportion to the work they performed.

William L. Holahan is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, also recently retired from USF. They are co-authors of "Economics for Voters." They wrote this exclusively for the Tampa Bay Times.

Column: Running the numbers on minimum wage 08/16/13 [Last modified: Friday, August 16, 2013 6:16pm]
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