Mirror of Justice

One of the challenges to achieving social justice by including a significant measure of government regulation of the private sector is to ensure that the secondary economic effects are considered in advance and do not threaten to undermine the primary effects sought to be achieved.  Until recent years, the bishops in the United States had a tendency to endorse government-centric platforms for social justice with little attention to or awareness of economic incentives, disincentives, collateral consequences, etc.  In more recent years, the bishops have appreciated the necessary prudential judgment that goes into evaluating the right mix of public and private, government and charitable, regulatory and market elements toward the end of reducing poverty and enhancing human thriving.

Yesterday's guest column on the economic consequences of increasing the minimum wages in the Minneapolis Star Tribune by Michael J. McIlhon, who teaches economics at Augsburg and Century Colleges here in the Twin Cities, ought to be required reading for anyone who aspires to "economic literacy" in public policy discussions.

McIlhon cites the "11th Commandment" in economics, which is "Thou shalt ever do only one thing."  The point is that by doing one thing, one inevitably does another as well (and another and another).  If the government mandates that employers provide health insurance to full-time employees, especially an expensive menu of prescribed coverage, while the result may be that some employees receive health care who did not have it previously, the other result will be that employers to remain competitive in labor costs will move more employees to part-time status and hire fewer full-time employees.  If the government requires that employers provide guaranteed leave for health or childbirth reasons, fortunate employees may enjoy that new benefit, while the employer likely will have to make adjustments in benefits or salaries or in overall number of employees to offset that cost.

And if the government increases the minimum wage that must be paid to employees on the lowest end of the pay scale, who overwhelmingly are those with less education and lower skill sets, some employees will receive higher wages while other employees will be laid off and still other potential employees will never be hired.  Indeed, as even advocates of a minimum wage generally must acknowledge, the calculation for the benefits to some of the increase always must include the number of jobs to be lost and not created as a consequence of increasing the cost of unskilled, low productivity labor.

Thus, while economists tend to differ about a lot of things, there is near unanimity that, as McIlhon describes it, "a minimum wage is a very bad antipoverty tool, poorly focused with some ugly side effects":

The National Bureau of Economic Research recently published work in which the authors find “no compelling evidence” that minimum wages raise household incomes. They found that the “disemployment effects” on some household incomes (the loss of a job or the inability to find a job at higher mandated wages) more than offset the income effects in other households of higher wages for those who manage to keep their jobs. Since both these effects are concentrated in lower-income households, the authors conclude that minimum wages simply redistribute income among low-income families, that they “help to raise the level of income above the poverty line in some families, but push income below the poverty line in others.”

Indeed, the problem with a raise in a minimum wage is worse than the immediate effect of simply redistributing income among the poor.  By thereby suppressing the labor market for uneducated, low skill workers, many people and especially teenagers will be left unemployed and deprived of the experience and skills training of a low-wage job as "the first rung on the productivity ladder."

Again, you can read the rest of this lesson in economic literacy here.