How About the Minimum Wage?
Jude Wanniski
February 1, 1999


Memo To: Sen. Gordon Smith [R-OR]
From: Jude Wanniski
Re: Minimum Wage

I see that you brought this issue up at the Senate Budget hearings last week when Fed Chairman Alan Greenspan was testifying. It was interesting to me that you were shrewd enough to know that a higher minimum wage would not cause problems for entry-level workers when the economy is booming, but that if the economy were to slump, it would cause great problems for them -- young men and women who might otherwise get jobs in an economy with a sudden surplus of labor. Senate Majority Leader Trent Lott will tell you that I advised him in the summer of 1996 that it would be okay to concede the issue to Democrats and raise the minimum wage by the modest amount then being proposed, because it would not cause serious macroeconomic problems. Greenspan, of course, understands the issue perfectly.

Think of it as being the equivalent of a tariff wall between the United States and Mexico. When our economy is booming, we don't worry that at the margin low value-added jobs are shifting to Mexico. The people who are in those industries may be distressed if their employers cannot shift to higher value-added production -- in textiles, for example, shifting from dish towels to fancy bedspreads. But when our economy is in contraction, the distress becomes extremely painful and our industries descend on Washington to beg for higher tariffs or non-tariff barriers like quotas.

The minimum wage is a wall between entry-level workers and marginal producers who can stay in business if they can hire entry-level workers at a competitive wage. If the government puts up the minimum wage, the marginal producer loses his only chance of staying in business. Is this bad? Well, it is for him, but not so bad for those of his competitors who are still in business. They have one less producer to worry about. They then can make a bit of a profit by increasing prices by a speck, because the least-efficient producer has gone belly-up because of the minimum wage.

Liberals do not mind this happening because their political support comes from the workers who are frightened of losing their jobs, either to Mexicans who work cheaper, or to entry-level workers who will work below the minimum wage. Sen. Teddy Kennedy is the foremost advocate of raising the minimum wage, yet he supports elimination of the tariff wall with Mexico. Senator Tom Harkin of Iowa is further out on the spectrum and supports a higher minimum wage and a higher tariff wall.

The fact that you have supported a higher minimum wage is nothing to be ashamed of. Greenspan says we should realize the minimum prevents entry-level workers from being educated on the job. That's why liberals justify a higher minimum wage and more spending on public education. They know young black men especially will lose out in an economic contraction. The last hired, the first fired. The answer to both the Mexican labor and the cheap domestic labor is a surplus of capital. This is why supply-siders in general, Jack Kemp in particular, have been fanatical about eliminating the capital gains tax. If you don't tax a capital gain, you maximize the formation of capital, to the point where businessmen across the country are scouring the missions and alleys and unemployment halls for labor. Write this on your sleeve: If Capital is in surplus and Labor scarce, living standards will rise at an optimum rate. You will not need tariffs or minimum wages.