Paul Jacob

When a minimum wage rate is hiked, it’s up to the employers to decide whether (a) to raise the wages of those working below the rate, or (b) to let them go, or (c) to downsize their jobs (say, raising their hourly rate but employing them for fewer hours).

Folks don’t go into business to deplete their wealth. They go into it for profits. When the cost of doing business rises — as paying higher wages neatly accomplishes — they tend to economize, shifting productive factors around to reduce costs. So, they often invest in capital goods that make labor more productive, allowing them to shift down on units of labor — hiring fewer people. So, even if they don’t fire anyone right after a minimum wage hike, they may lay off hiring more people as time goes on, or downsize jobs over time.

The effect on employment is there, but not so as you’d notice.

Further, as they must pay for more low-end work, employers tend to substitute more qualified laborers for less-skilled ones. So the unemployed college grad is going to find it easier to get a job than a high-school dropout — much easier, since the deck has been rigged in his favor.

It’s not difficult, then, to see why politicians tend to prefer incremental increases in the minimum wage to huge leaps: The damage done is comparatively small, the people who are most hurt are less likely to realize who imposed the harm and also less apt to vote than those who are helped or not at all effected, and some of the effects are spread out over time to decrease the likelihood that voters would notice.

But hike the rate to above most market wages, and you’d see massive unemployment. Most folks would get hurt.

And even politicians would suffer.

By raising the minimum wage to $9 an hour, Barack Obama risks little. Most of his admirers will impute continuing high levels of African-American unemployment to other factors, seniors and union workers won’t be affected directly, and white high-school grads and college students may even be helped, if at the expense of others. So he’s covered several of his major Democratic constituencies.

Of course, it makes hash of the “Democrats care about the poor” mantra.

But that’s only if you are paying attention.

It might behoove Republicans to make Americans pay attention. Make the minimum wage a “teachable moment.” Up the ante. Demand (as I suggested above, and at Common Sense on Friday) that any minimum wage rate hike be significant, so that it could affect most folks’ wages.

And let the conversation begin. In earnest. And rationally. Not with knee jerks, bluster, and the usual political hucksterism.      [further reading]

Paul Jacob

Paul Jacob is President of Citizens in Charge Foundation and Citizens in Charge. His daily Common Sense commentary appears on the Web and via e-mail.