Sunday, April 6, 2014

Why Robert Reich's Seven Reasons for a $15 Minimum Wage Are Rubbish

Minimum wage has become a hot-button topic these days. Senator Harry Reid is trying to enact a $10.10 minimum wage because he thinks that $10.10 is the right amount to help people escape from poverty. Some individuals, such as the fast food workers who were protesting a few months ago, erroneously believe that a $15 minimum wage would be appropriate. Former U.S. Secretary of Labor Robert Reich happens to be one of those individuals. He recently came out with a concise video (see below) as to why he believes the minimum wage should be raised to $15 per hour. For me, it does not matter whether a bad idea originates from an uneducated layman or a former Harvard professor with a background in economics because a bad idea is still a bad idea. Let me list Reich's seven reasons and where he goes wrong in his video......

  1. The adjusted minimum wage from 1968 is $15/hour. Reich argues that when both inflation and productivity are factored into the equation, minimum wage should come out to $15 per hour. This assumes that the minimum wage was set at the "right amount" back in the late sixties, and that minimum wage is actually an effective tool against poverty. When adjusted for inflation alone, there is some deviation, but not as much as Reich would hope for. Even if you want to make the productivity argument, what do you think was the cause of the productivity gains over the past few decades: a spike in work ethic or the technological advances made?  
  2. $10.10 is not enough to lift people out of poverty. I can go in many directions with addressing this fallacy. The main counterpoint I will make here, much like I did in my recent discussion on the Earned Income Tax Credit (EITC), is that minimum wage targets low-income workers, not low-income households. To Reich's dismay, the overlap between low-income workers and low-income households is nowhere near 100% because many minimum wage workers live in households with those earning well above minimum wage. If you want to fight poverty, try something else.
  3. We subsidize low-wage workers in form of the welfare system. Two points I would like to bring up here. The first is that we don't need to have a welfare system. Reich brings up the fact that we subsidize the poor in the form of Medicaid, food stamps, and housing subsidies. If the welfare system is that burdensome, we should talk about doing something to scale that back instead. Second, the government declared a War on Poverty back in the Johnson administration. How well has that been working out? Do we honestly think that raising the minimum wage to $15 is going to decrease the aggrandizement of the federal government's scope? Going back to Point #2, raising the minimum wage by more than double is not going to solve the problem.
  4. Increased minimum wage = more jobs. Reich either neglected to read or decided to ignore the Congressional Budget Office's recent report on the effects of minimum wage. That would be the report that said that a $10.10 minimum wage would put around 500,000 employers out of work. Consider that is the net loss in employment for a minimum wage increase to $10.10. Think of the magnitude if that were $15! The minimum wage is a price floor above equilibrium point, and the fact that Reich forgets that basic economic concept, not to mention the "law of demand," says a lot right there.
  5. Wage increases are more likely to come out of profits, not prices. There is more than one way to skin a cat, and absorbing the costs of a minimum wage hike are no exception. Aside from taking the costs from price increases from the product or from profits, an employer can also lay off minimum wage workers, decrease worker benefits, reduce worker hours, or depending on the industry, the employer can find automated technologies to replace some or all of worker responsibilities and duties. What Reich neglects is that most businesses are for-profit, which means that they entered the industry to make a profit. While profit motive is not the only reason for working, it certainly cannot be ignored as having potent predictive power. Even non-for-profit organizations need to keep afloat. Labor is a cost of doing business, and the burden of minimum wage is squarely imposed on the employer. The typical business owner would increase prices or lay off laborers before they would consider a substantial decrease in profits. 
  6. Politics means that we need to ask for what's right now. Not only do I vehemently disagree with Reich's proposal for a $15 minimum wage, but he does not have a good grasp of political feasibility if he is making this comment. The House of Representatives has a Republican majority, and even the Democrats pushing for a minimum wage increase don't want to be excessive, hence why they want a $10.10 minimum wage. Simply put, asking for a $15 minimum wage is politically infeasible. 
  7. It's not just smart, it's right. Is it right to make it more difficult for employers to hire young and low-skilled workers so that they can acquire the skills to move up to higher-paying jobs? Is it right to tell an employer what to do with their business by coercing employers to pay employees higher than their marginal value? Is it right to cause more unemployment during a time when unemployment is still high? Is it right to grandstand about helping the poor when the minimum wage does a lousy job of targeting the poor and causes more unemployment amongst the poor, the very people proponents claim to help? The minimum wage is not smart. The minimum wage is not right. The minimum wage is merely poor public policy that harms those that it was intended to help.


  1. It is very important for our society that we should be given minimum wage of all our labors. us minimum wage Fair labor standard act is working for United state Federal and local law relating labor standards and to help all employer their right and law under role of law. All worker can be conscious about any kind of the labor law to read

    1. Malia, your comment runs into three major problems, the first being that it does not directly address anything I say. Second, do you have any sound empirical evidence to back your findings? Aside from good intentions, can you explain why minimum wage is good for society? Third, if we're going to talk about what is fair, is it fair to make the minimum wage $10.10 while rendering half a million individuals of unskilled labor unemployed?