January 27, 2014
By Oren M. Levin-Waldman, Ph.D.
Since the beginning of the New Year, a couple of states have raised their minimum wages and President Obama plans to call for an increase to $10.10 an hour. Additionally, the Democratic Party plans to incorporate the minimum wage into its 2014 midterm election platform. Of course, the critics are already out with the standard bromides that it will lead to lower employment, and that it is particularly a bad idea in a weak economy. And yet, when the Fed announces an action that could also lead to unemployment, all of a sudden there is silence.
The Fed’s recent announcement that it would scale back its stimulus because the economy is on the mend is only a prelude to raising interest rates sometime in the future. When its target of only 6.5 percent unemployment is reached, it will then cite inflationary pressure as cause to apply the brakes to the economy. Applying the brakes in an effort to curb inflation only means a slower economy and ultimately an increase in unemployment. In other words, the Fed that has refused to raise interest rates thus far in an effort to address deep and long–term unemployment will only add to the unemployment in the future.
Financial markets rallied. Business interests seem to think that unemployment is a worthwhile price to pay for stability in the financial markets. But they are also the first ones to scream when proposals to raise the minimum wage are made. Now they allege that raising the minimum wage will only have adverse economic consequences.
Why is it that critics of minimum wages often point to adverse employment consequences, but are silent when the Fed raises interest rates to reign in inflation? Hiking interest rates also has a disemployment effect. Business interests often find themselves arguing from naked self- interest. There is nothing wrong with that in a market economy, but let us at least be honest about it. To cloak their selfishness in the language of concern for those who will supposedly lose their jobs and flawed economic models obviously sounds nicer. Moreover, it sounds so reasonable. And yet, if we really care about unemployment, the Fed should never be permitted to raise interest rates .
The minimum wage, as is the case with all issues, really has less to do with economics and more to do with politics. Or it has something to do with economics in the traditional understanding of the term– behavior. The economics of the minimum wage is how different groups respond to specific policies. The politics, of course, is who gets what when and how.
The data does not back up the claims of the standard model with regards to the minimum wage, but we have experienced severe periods of unemployment following interest rate hikes, especially large ones. And yet, we will hear little protest over interest rate increases, albeit they may be modest. We will, and also do, hear considerable protest over even modest increases in the minimum wage.
The median hourly earning in 2012 was $14.90 an hour. If we assume that this would also be the market clearing wage, we would have to further assume that it is the tipping point; a new minimum in excess of $14.90 would most likely lead to a disemployment effect. That also means that an increase in the minimum wage to $10.10 would not.
Defenders of the Fed’s announcement will no doubt argue that the Fed’s actions will be moderate and gradual which they believe will have negligible, if any, employment consequences. Similarly a moderate increase in the minimum wage will also have negligible, if any, employment consequences. It is high time to end this hypocrisy and really pursue policies that will not only benefit monied interests — those that derive the greatest benefit from the Fed’s traditional anti-inflation bias — but will also benefit the middle class. The minimum wage is really about the middle class because it will enable them to have greater purchasing power.
If business interests can continue to distinguish between necessary unemployment arising from Fed actions and unnecessary unemployment arising from increases in the minimum wage, they only betray their partisan leanings. They demonstrate that they have no real concern for the unemployed.
Rather their concern is for those who may have to pay higher wages to those who truly need them. When businesses pay their workers low wages and rationalize those low wages in the language of "flexible labor as the key to greater employment," they are imposing a social cost on society. Just as there is a trade-off between employment and inflation in the world, there is also a trade off between low wages and social costs in the labor market.