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On November 5, voters in five states—Alaska, Arkansas, Illinois, Nebraska, and South Dakota—will decide whether to increase their respective states’ minimum wages, with the stated purpose of alleviating poverty.
In addition to state-level initiatives usually funded by organized-labor groups, some in Congress have been pushing for a hike in the federally mandated minimum wage, a “price floor” for labor below which no state will be allowed to fall.
Although conventional wisdom suggests President Obama and his congressional allies’ interest in the minimum-wage debate is political in nature—and I do not entirely disagree with the hypothesis that it is an effort to boost flagging popularity in a midterm election year—it is irrelevant whether progressives in the local union hall or progressives in the nation’s capital are the ones behind minimum wage hike proposals. The policy still creates a surplus of workers and hurts those it purports to help.
By raising the cost of an employee beyond the natural convergence point of supply and demand curves, minimum wages cause the price of filling an entry-level job to exceed the marginal value of hiring one more employee. Businesses are not charity programs; a company does not hire an employee because the employee needs a job; it makes the hire out of a self-interested expectation of receiving more value from the employee’s work than the agreed-upon wage paid to the employee.
That, of course, is the same reason people spend any money on anything: The value derived from obtaining the items or services exceeds the attachment to those funny green strips of paper in their pockets. Raising the price of anything, including labor, means fewer people will buy it.
Like the law of gravitational attraction between pieces of matter or electromagnetic radiation’s inverse-square law, the law of supply and demand applies universally. Bad policy ideas that raise the price of labor will hurt the unemployed and underemployed, wherever they may be.