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The Minimum-Wage Horse That Won’t Die

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Here’s another letter to my new correspondent Marion Ellis.  (Mr. Ellis, by the way, wasn’t the only person to e-mail me to accuse me of ignoring this alleged happy consequence of raising the minimum wage.)

Dear Mr. Ellis:

You ask why I “disregard the higher spending by minimum wage workers as a cause of more demand for these workers.”  With respect, while all arguments in favor of the minimum wage are bad, among the absolute worst of these arguments is the one (that you offer here) that says that a hike in the minimum wage causes the demand for low-skilled workers to rise because these workers will then have more money to spend.

First, your argument blithely assumes that the demand for low-skilled workers is (to use an economics term) inelastic – that is, it assumes that the percentage increase in the minimum wage is larger than the resulting initial percentage reduction in employers’ demand for hours of low-skilled labor.  But if instead – as seems more plausible – the demand for such workers is elastic, then a hike in the minimum wage reduces the total amount of income earned by minimum-wage workers.  Such workers then have less, not more, total income to spend.

Second, even if (as your argument assumes) the demand for labor is inelastic, the extra income earned by low-skilled workers comes from somewhere.  This fact means that other people in the economy – employers whose profits fall because of their higher wage bills, and consumers who spend more on the likes of higher-priced fast food and motel rooms – must spend less elsewhere, thus likely offsetting the increased spending by minimum-wage workers.

Third, your argument assumes that all or most of the extra income received by minimum-wage workers is spent in ways that support each other’s employment.  To see why this assumption is illegitimate, ask yourself if you think that a legislated minimum price for bread will cause bakers to sell more, rather than less, bread.  Do you think that if bakers as a group earn higher profits because of this legislation that they’ll spend enough of those extra profits buying so much of each other’s bread that the total amount of bread sold will rise beyond the level it achieved prior to the mandated hike in the price of bread?  Both common sense and economic theory tell us that such an outcome is extraordinarily unlikely.  Yet such an outcome is not much different from the one that you assume regarding the extra spending of minimum-wage workers.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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