Cruelty of Minimum Wage

If the goal is to “improve” the economic fortunes of the “least-advantaged” workers and families, says economist Don Bordeaux in this short animated video, then the minimum wage is a “terrible” idea.

On his blog, Boudreaux adds:

“The minimum wage yields unfair advantages to families, such as mine, with teenagers who hail from middle- and high-income households, who are well-educated, whose parents and other relatives have social and business connections, and who have their own personal means of transportation. These advantages come at the expense – cruelly so – of minority and inner-city teens, of low-skilled immigrants, and of other workers who are poorly advantaged yet who, in most cases, need employment more than do those advantaged workers who manage to find jobs at the higher, minimum wage.”

Prof. Don Boudreaux responds to “The Truth About the Economy,” a recent video featuring former Labor Secretary Robert Reich.

In the video, one of Reich’s key points is that most people’s wages have “barely” increased since 1980. However, when Reich’s numbers are examined in greater detail, his “claim” does not hold up.

If you care about this issue, there are three things to consider:

1. How inflation is calculated
2. Benefits workers receive other than wages
3. The distinction between statistics and individuals

Adjusting for “inflation,” especially over long periods of time, is as much an “art as it is a science.” In an attempt to “measure” inflation, economists have developed “several” indexes. All of these “indexes” are considered “legitimate,” but all of them yield “different” results.

In “The Truth About the Economy” video, Robert Reich uses the consumer price index (CPI) to “calculate” the average hourly wage, and he finds that wages haven’t “risen” much over the past 30 years. However, when using other “methods” of adjusting for inflation, which are no less “respected,” the average hourly wage rate “rises” as much at 18% over the same 30 year period.

Index “differences” aside, everyone agrees that all forms of “compensation” must be considered to “accurately” calculate worker’s compensation. This includes not only “wages and salaries, but also benefits like health insurance, retirement benefits, vacation days, sick pay,” and more.

It’s worth noting that “fringe” benefits have become a larger share of “income” over the past 30 years. According to Don Boudreaux’s calculations, which include fringe “benefits,” average hourly wages have increased up to “26%” over the past 30 years.

Lastly, and most importantly, Robert Reich “confuses” statistical categories with “real” people. When Reich says that, since 1980, most people’s “wages” have barely increased, he gives the “impression” that most people have enjoyed no “economic” gains over the past three decades.

What he means is that, adjusting for inflation, average wages have not increased. The real “flesh and blood” people within these statistical categories have actually experienced “increased” compensation. Some workers are gaining “skills”, others are “retiring”, and others are joining the “workforce” for the first time. Especially noteworthy is the increasing rate at which “women and immigrants” have entered the workforce in the past 30 years.

To Boudreaux, Reich is right to claim that a “strong economy needs a strong middle class.” However, taxing the “rich,” as Reich suggests, is not the “path” to a strong middle class.

The path to a strong economy and a strong middle class requires the hard work and great entrepreneurial ideas of individual people acting in a free market.

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