Josh Dowlut's  Instablog

Liberal lobbying group Progressive Maryland is pushing hard to raise the minimum wage to $10/hr and is using a truly novel argument to support their position.  The group argues that such a policy would be economically stimulative and actually good for business by putting more money in consumer’s hands, and therefore increase demand for business.  They are arguing a valid point that an increase in aggregate demand will lead to an increase in total output and employment.  Their logic breaks down in their use of one-sided accounting that completely ignores the impact of increased labor costs on businesses.  Their creativity and strategy to shift the debate off the standard fairness paradigm of equality versus efficiency is commendable.  Their understanding of 3rd week introductory economics material is not.

Such policy will absolutely, positively, without any serious doubt, or debate, reduce both total output, and total employment.  The only serious debate is to what degree.  The reason is due to the Golden Rule of microeconomics:  A business will produce where marginal revenue=marginal cost.  This simply means that a business will continue to produce as long as each additional unit of production brings in more revenue than it costs.  If production costs exceed revenue, the business will scale back production.  A government mandated increase in labor costs will increase marginal costs and therefore result in a cutback in production and employment.  While there would be some increased demand or consumption due to the income effect of higher wages, such benefit would be diluted for the effected business, while the costs would not be and the net impact would be the employment reducing cost increase.  Payroll taxes which are a tax on gross wages (as opposed to net profits) have the exact same impact due to the marginal revenue=marginal cost Golden Rule.

Progressive Maryland’s goal is noble.  However, their method of achieving it is no more logical than painting over your interior drywall to fix your leaking roof.  The root causes of wage stagnation for the last 40 years are highly complex, and admittedly much of it (arguably most of it) is at the federal level due to pro-inflation monetary policy, and the expansion of the payroll tax.  At the state level, regulations aimed at limiting entry level entrepreneurship such as basic home improvements, cosmetology, and taxi driving, have kept people in the clutches of vertical hierarchies of employment when they could have struck out on their own.  State unemployment insurance which only applies to the first $8,000 of wages is a disproportionately burdensome tax on lower incomes.  A revenue neutral rate adjustment to apply the tax to all wages would help those at the bottom of the wage spectrum.

The absurdity of Progressive Maryland’s argument is that they fail to concede any tradeoff cost.  The slightest degree of critical thinking sees that there must certainly be a tradeoff cost, otherwise why not make the minimum wage $100/hr?  And in failing to identify or concede any tradeoff cost, Progressive Maryland violates the Golden Rule of all economics:  There is no free lunch.