Why Do Intelligent Politicians Support A Minimum Wage Proposal That Will Kill Jobs?

In the Thursday, January 30, 2014, issue of The Wall Street Journal, Michael Saltsman, a Research director at the Employment Policies Institute, wrote a well-argued Op-Ed piece entitled “The Employee of the Month Has a Battery.” He argues, as I have, that higher minimum wage laws are job killers.

Saltsman makes a very compelling case to support this:

• Self service is taking hold fast. According to Saltsman, major restaurant chains like Bob Evans and Chili’s are even getting customers to clear their own tables.
• McDonalds is replacing human cashiers with touch-screen alternatives at more than 7,000 European locations, a practice it will undoubtedly adopt here much more rapidly.
• The use of tablets to order food has expanded to national franchises like Outback Steakhouse.
• In San Francisco., a company called Momentum Machines has developed a burger-flipping robot that replaces three full-time kitchen staff.

The only circumstances in which higher minimum wages will not reduce the overall number of jobs are those in which, either by law (e.g. state laws that require a minimum staffing level at a licensed child care site), contract (e.g. outsourcing agreements that require a minimum headcount), collective bargaining agreements, or the size of a business (e.g. a business with one retail clerk at a location), staffing cannot be reduced. Otherwise, between automation, process reengineering and self service, every population of jobs can be eliminated.

Elected officials like President Obama are smart people. The law benefits a discrete and small segment of the population and hurts everyone else. What explains their relentless pursuit of legislation that will inevitably kill or prevent the creation of millions of jobs?

There are two explanations, both of which are symptomatic of a philosophy of government based deeply on accumulating and retaining power. Both make sense only if we assume that elected officials are in permanent campaigning mode trying to secure their voter base and attract a few additional voters.

Explanation 1: There is a small, vocal organized set of constituencies for higher wages that has more power and influence than the larger disorganized population that will be hurt.

Elected officials respond to those who reward the tangible benefits that elected officials deliver by voting to elect or re-elect them. Single-issue constituencies like the National Rifle Association have power beyond their numbers: support of the NRA agenda is a litmus test for many voters, and the money the NRA raises has an impact beyond their numbers.

Workers who benefit from minimum wage laws link them to the lawmakers who mandate them., as do advocacy groups that represent them. Individuals deprived of a job offer that disappears will not make the connection between the disappearing job opportunity and the higher minimum wage that has made it economical for the business to replace a human being with either a self-service process or a robot.

The only circumstance in which individuals might make a connection would be if employers eliminated their minimum wage jobs. However, large employers often phase in technology to leverage natural attrition to avoid severance payments and unionization threats.

There is no organized constituency that connects lost jobs and higher minimum wage. No lawmaker learns specifically of the decisions made every year by organizations that effectively eliminate jobs that would have been in place with a lower minimum wage. Leaders respond to the individual story of someone avoiding tragedy because of a higher minimum wage; the millions of thousands of people who never get a job opportunity are a “statistic”.

Elected officials always draw in more campaign contributions from single-issue organized constituencies that want to protect or enhance an existing benefit, not from a much larger number of voters who never realize that benefit.

Explanation 2: Minimum wage advocacy enhances the broader inequality narrative, which, in turn, provides the potential opportunity for longer term benefit in political power concentration.

The “minimum wage” narrative serves a broader narrative: rising inequality requires wealth redistribution. Politics today is increasingly about narratives reduced to sound bites that can mobilize a voter base, not what benefits the largest number of people at the lowest cost to the taxpayer, or what actually creates more jobs.

Thomas Sowell, an economist at the Hoover Institute at Stanford University has made an insightful comment about advocacy of wealth redistribution:

In a September 24, 2012, op-ed piece in Newsmax.com, he stated that: “You can only confiscate the wealth that exists at a given moment. You cannot confiscate future wealth — and that future wealth is less likely to be produced when people see that it is going to be confiscated. “

www.newsmax.com/ThomasSowell/Fallacy-Wealth-Redistribution-Obama/2012/09/24/id/457323#ixzz2rxz4k1Tb

The only credible connection between a higher minimum wage and the overall inequality narrative is what is called the “ripple effect,” that is, that a higher minimum wage will lift wages and salaries much more broadly by putting upward pressure on them from the bottom.

Katie Lobosco, a small business columnist and Forbes magazine contributor, made this point in a CNNMoney posting on January 14, 2014, entitled “Minimum Wage Hike Could Mean A Raise For All.” She cites an Economic Policy Institute prediction that, while a higher minimum wage, based on laws already in place, will directly affect 2.6 million workers, the total effect will include an additional 2 million workers.

money.cnn.com/2014/01/14/smallbusiness/minimum-wage-hike/index.html?iid=EL

The “ripple effect” does not account for the fact that a job that pays higher than minimum wage and gets increased in pay and in benefits tied to pay, like Social Security and Medicare taxes, 401(k) benefits and pensions, and workers and unemployment compensation taxes, is an even more visible target for job elimination.

Higher pay and benefits reduces the pool of jobs. The “ripple effect” simply expands the pool of jobs vulnerable to elimination.

So, if the narrative is conceptually flawed, why do politicians continue to use it? Both parties are dominated by their more extreme and ideological members. The narrative helps the party get elected and re-elected and pursue its entire agenda, not just the flawed agenda which it might use to get elected.