Steve Chapman

If you offer people something that is too good to be true, you will always find takers. Ask Bernie Madoff. Or ask Barack Obama. He recently proposed an increase in the minimum wage -- an idea that suits the natural predilections of many people enough to distract them from the unsentimental and unwelcome logic of economics.

One poll found that 63 percent of Americans favor raising the federal floor from the current $7.25 to $10.10, as the president recommends doing over two years. The reasons are obvious. Wages have stagnated, low-income Americans are getting a smaller share of national income and many working people are stuck in poverty despite their best efforts. A higher minimum wage is the obvious solution.

Obvious, but wrong. The proposal rests on the assumption that the government can decree the price of a commodity -- in this case, labor -- in defiance of the dictates of the market, without ill effects. But that view requires a heroic suspension of disbelief.

When stores want to move slow-selling merchandise, they cut prices. When customers clamor for more of an item than sellers can provide, they raise prices. Lower prices result in higher demand, and higher prices do the opposite.

This is not exotic free-market dogma but elementary economics. Any CEO who proposed to boost sales by jacking up prices would see the company's stock price plummet in response to this lunacy.

But supporters of a higher minimum wage would have us believe that low-wage workers are magically exempt from these phenomena. They claim companies will employ just as many employees at $10.10 an hour as they do at $7.25.

But they must doubt their own case. Otherwise, they would propose an even higher amount, confident it will be irrelevant to hiring decisions. If a minimum wage of $20 or $30 an hour would cause layoffs, though, why wouldn't $10.10? At what point on the wage scale does the law of supply and demand take effect?

Even liberal hero Paul Krugman, a Nobel laureate in economics and columnist for The New York Times, has grudgingly acknowledged this reality. In his 1998 textbook, he wrote that "the centrist view is probably that minimum wages 'do,' in fact, reduce employment, but that the effects are small."

In the short run, McDonald's and KFC might have little choice but to keep staffing at current levels and cough up more on payday. But in the long run, employers would have a significant incentive to find ways to employ fewer workers -- by automating tasks, moving to more self-service, demanding more of each employee, cutting back store hours or closing marginal outlets.


Steve Chapman

Steve Chapman is a columnist and editorial writer for the Chicago Tribune.
 

 
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