Higher minimum wages: “gentrifying” the job market

Over the years, I have met many elected officials, more often than not, Democrats who, from a combination of wanting to make peoples’ lives better through laws and regulations and resentment against successful people, advocate sweeping changes to “redistribute wealth” or “reduce income inequality.” More often than not, they fail to achieve their goals, because, despite compelling evidence to the contrary, smart or rich people who are determined and agile find a way to turn every new law, regulation, or changed market situation to their advantage.

Most of those who are poor and disadvantaged before one of these laws are enacted remain that way afterwards.  In fact, they often are in a worse position as a result of the law’s unintended consequences.

Those who benefit from wealth or income redistribution are those who position themselves as intermediaries between the wealthy who are taxed and the less wealthy who are supposed to be getting wealth or income redistributed to them.  The biggest single intermediary who benefits is the elected official who extracts campaign contributions or other forms of help from the wealthy people who are trying to avoid or minimize their tax or regulatory burdens, or from the less wealthy people and their advocates who are trying to accelerate or enlarge redistribution.

The same thing would happen with an enactment of President Obama’s proposed $10.10 federal minimum wage and the unintended negative consequences would be even more pronounced if, as proposed, a $15 an hour minimum wage were enacted in some communities.

I have written about what I believe is the biggest issue with these proposals:  the number of jobs will shrink significantly.  In fact, I believe that the Congressional Budget Office forecast of 500,000 lost jobs for a $10.10 per hour minimum wage significantly understates the job loss problem.  If the minimum wage were $15 per hour, the job losses would even be greater, because the economic payback period for cutting jobs or replacing them with technology would be shorter and the level of payback would be higher.  Even if this were the only negative consequence of higher minimum wages, the notion that millions of Americans who are now part of the working poor will be lifted out of poverty with minimum wage legislation is a well-intentioned law that will create crushing disappointments for those counting on it to help them.

Recently, an owner of a set of fast-food retail franchise outlets highlighted to me another likely downside to an increased minimum wage.  The assumption most proponents of higher minimum wages make is that desperately poor people who make $7.25 per hour will now make $10.10 per hour or more and be lifted out of poverty.

Consider what will happen with higher minimum wages as a form of “gentrification” of jobs.  When neighborhoods are upgraded, wealthier people push out poor people.  When jobs are upgraded, by force of law or by market conditions, wealthier poor push out poor people.

Why do I say this?  In the early 1970’s, when President Nixon and the Congress radically raised pay levels for military recruits to create an all-volunteer army, one of their rationales was that a much higher class of recruit would be drawn to the Army.  They were right.  The quality of “volunteers” who enlisted in the Army during the pre-1973 era when the Army also had draftees was very poor, typically those on the margins of society.  After 1973, the enlistees were far better educated and literate.  Many enlistees from the pre-1973 era would never been accepted in the post-1973, higher-paying volunteer Army.

I saw it first hand as a reservist who served on active duty before the higher pay grades for the volunteer Army were in effect.  Serving along side me in basic training were volunteers who were functionally illiterate, some of whom had been convicted of crimes as civilians.  These criminals were “offered” the choice of jail or the Army when they appeared in court.  Military personnel I met after the all-volunteer Army went into effect were literate, educated, and highly competent people.

Better-educated unemployed or underemployed people, particularly younger college graduates, will compete with the less well-educated people who currently either apply for or occupy these positions, and the jobs will be redesigned to require higher literacy, better math competency and more technology skills.  Most of the people who held the $7.25 per hour jobs will not the people who hold the $15 per hour jobs, or even the $10.10 jobs, that remain.

In the context of the subject matter touched upon by our film From the Rough, this is essentially what happened with caddie positions.  As golf carts began to replace black caddies, the remaining positions became higher paying and more prestigious.  The much larger population of young white people, who aspired to golfing careers, began applying for these jobs.  Today, there are far fewer caddies and most of them are white.  When the jobs were lower paying, dirtier, and less prestigious, most caddies were black or Hispanic.

We saw the same pattern in researching the plight of women coaches after Title IX.  When Congress, the U.S. Department of Labor, and the NCAA began requiring more women’s teams to be formed and led to higher compensation for women’s team coaches, more men successfully competed for the jobs.

Whereas, before Title IX’s 1972 enactment, women coached 90% of women’s college teams, in 2012, women coached 42% of the teams at the 40th anniversary of Title IX’s enactment.

Employers who recruit for these higher priced jobs will be able to secure more promotable candidates with the capacity to get additional schooling and training as needed, and with fewer non-job-related challenges.  The people displaced by the higher minimum wage, even if the position remains in place, will be pushed downward into fewer and less secure positions, and, over time, will be pushed into welfare and away from working altogether.  This will create much higher taxpayer burdens.

One of chronic problems with the Obama Administration and the members of Congress and the Democrats and Republicans in state and local governments who favor proposals such as higher minimum wages is that they completely fail to understand the behavioral responses to the laws and regulations they enact.  The Congressional Budget Office report, which was flawed because its research data was stale, predicted that 16.5 million people would see wage increases.

Even if this were true, which I doubt, because I believe many jobs will be eliminated, it is likely that the people in the 16.5 million cohort will look very different from those in it today.  The failure of Democrats to understand this dynamic response to higher wages directly flows from their mistaken belief that the difference between successful and unsuccessful people is heavily attributable to differences in good fortune that can be legislated or regulated out of existence.

All of us know, from our daily life experience, that some people have wealth, talent and passion to achieve a particular goal that causes them to succeed, no matter what rules and environmental conditions are in place.  All that happens when elected officials try to “level the playing field” is that they invite the more determined members of the group affected by the new rules to adapt and find even bigger sources of advantage.

The position of Democrats, starting with the President, that trying to redistribute wealth, income, or access to opportunity will help the people it is intended to help is flawed.  Some of the group will benefit, but far fewer than advocates for these policies believe.

I would finish by recalling one example from 19th century American history.  Many Americans of limited and modest income flocked to California during the Gold Rush of the 1840’s.  A few actually discovered gold, and became rich as a result.  The vast majority were made poorer and left quite disappointed.

The real money on the Gold Rush was made by the enterprising Levi Strauss, who started a business to sell clothing to the gold miners, the companies that sold the tools and implements to the miners, and those who arranged or provided transport to and from California for the miners.

Higher minimum wages are simply the latest example of the disappointment that inevitably waits the poor people who think that the “gold” of a job that pays a higher-than-poverty-level wage will be awaiting them.  They will not be the beneficiaries of these well-intended, but flawed, laws.