Pennsylvania Legislature Raises Wages Again

Nothing exposes the ignorance or insincerity of policy makers more than support for the minimum wage. If wages could be set by government decree, then why stop at paltry $7.15 an hour as the Pennsylvania house recently did, and wouldn’t Governor Rendell be right to complain about waiting until January 1 to begin raising wages? Why not immediately raise the minimum wage to $100 an hour or, even better, $1,000? That massive unemployment would result from such misguided policy is obvious to anyone whose mind is not captive to the Marxian myth of capitalist exploitation of labor.

In reality, businessmen do not earn the lion’s share of income generated by production. Labor earns 80 percent of all income in our economy, the remaining 20 percent being divided among profit, interest, and rent. Profit makes up less than 10 percent of all income. And this 80-20 pattern has persisted for at least a century. Even if all profit was distributed to workers this would mean a one time 12.5 percent raise for workers. After that, there would be massive business shut downs and wage income would collapse.

The money a businessman has to pay workers comes from consumers who buy his products. He can only pay a worker the value of his contribution to the satisfaction of consumers. If he pays more than that, he will suffer losses and eventually go out of business. If he pays less, then other businessmen can earn profit by hiring the worker at a wage closer to the value of what he produces. But if he cannot attract and retain workers from other businessmen, he will be driven out of business. Thus, the market constrains businessmen to pay a worker the value of his contribution to production.

The value of a worker’s contribution depends, in turn, on the capital equipment he works with. How productive would an autoworker be with primitive hand tools instead of a modern factory? Capital goods are produced because capitalists restrain their consumption and invest in such production. If their investment spending on capital goods is sufficient, the production of capital becomes profitable. Once again, the lion’s share of the benefit of capital goods goes to workers whose wages are increased by the greater productivity of capital.

For his enterprise to survive, a businessman must keep the costs he incurs below the revenues he earns from consumers. He cannot pass wage increases, or increases in other costs, on to consumers by asking higher prices for his products. At higher prices, some consumers will buy less and his revenues will decline. If higher prices meant larger revenues, the businessman would have already raised his prices to earn these revenues.

Raising the minimum wage cannot increase overall income since businessmen would have to offset the additional costs they incur to pay more to minimum wage workers by paying less to other workers or for products they buy, which reduces the wages of workers producing those products. Overall income can only be increased by producing more goods, which requires more saving and investing. An effective increase in the minimum wage cannot increase income throughout the economy. Instead, it generates unemployment.

A $7.15 an hour minimum wage would make unemployable any worker who cannot contribute more than $7.15 of value to consumers. Typically these are young, inexperienced workers performing unskilled, manual (read: using primitive capital) tasks. In 2005, the overall rate of unemployment was 5.6 percent but the rate for 16-17 year olds was 19.7 percent and for 18-19 year olds was 15.8 percent. In Europe, where minimum wages are nearly twice American levels, overall rates of unemployment are above 10 percent and rates for teens are a multiple higher, the same pattern we see here.

But the extent of unemployment from raising the minimum wage depends on how far above market wages it is and how vigorously it is enforced. If hamburger flippers currently make $6.00 an hour, a $5.15 minimum wage will have no effect on employment in hamburger flipping. Raising it to $7.15, however, would result in unemployment commensurate with enforcement.

With the legislators in Pennsylvania, who infamously milked the taxpayers to raise their own wages by government decree, it’s hard to know whether they actually believe they can raise workers’ wages by decree or are merely grandstanding to try to take credit for the rising wages brought about by saving and investing or are knowingly sacrificing the well being of less productive workers to benefit unionized labor. Whether ignorant or insincere, their vote to raise the minimum wage exposes them as unqualified to make wise policy.

About Jeffrey M. Herbener

Dr. Jeffrey Herbener is chair of the department of economics at Grove City College and fellow for economic theory & policy with the Institute for Faith and Freedom.

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