Minimizing The Damage From Michigan's Minimum Wage Increase
Higher prices, including for labor, result in less of the product or service being offered
"Good intentions don’t trump the laws of economics."
That was the message from James Sherk, senior policy analyst in labor economics at the Heritage Foundation, at the start of a Mackinac Center for Public Policy Issues & Ideas forum Tuesday in Lansing.
Republican Gov. Rick Snyder signed a bill at the end of May that increased the state's minimum wage up to $9.25 per hour by 2018. It garnered GOP support and a push from top GOP officials mostly to avoid a ballot proposal that would have raised the minimum wage up to $10.10 and eliminated the tipped worker exception.
The economic "law of demand" states that as the price of something rises, less of it is demanded. Sherk said many of the left agree with this on most issues.
"That's why unions support trade barriers," Sherk said. "Because they agree that making goods coming from other countries more expensive incentivizes Americans to buy more products made in the United States. [But] they ignore this law when it comes to the minimum wage."
Sherk said that the value of someone's labor is determined by what others are willing to pay for it. Competition in the market forces businesses to pay the perceived value of their workers. If they pay more than the true value, they are harmed, while paying less encourages employees to jump ship to a different company.
"That's why 97 percent of American workers make more than the minimum wage," Sherk said. "It is not because businesses are just simply being generous."
Sherk said the most harm from the policy affects low-skilled workers and society in the long term.
"The primary value of the minimum wage job is not the pay today, but the skills it generates for the future," he said.
Sherk asked the room who has worked a job for minimum wage or less and then who has worked an unpaid internship. The vast majority raised their hands. He noted that this is typical since the majority of Americans started out making around the minimum wage.
"What happens when you raise the minimum wage is you saw off the bottom rung that lets low-skill employees enter the workforce,” he said.
To minimize the harm from Michigan's minimum wage increase, Sherk proposed three things:
- Expand the teenage opt-out. Lowering the requirement for younger workers means employers would have an incentive to keep those entry-level jobs for teenagers.
- Make it minimum compensation. When the mandated wage goes up, companies eliminate other benefits, which is one-third of worker compensation nationwide.
- Use the most accurate inflation adjuster. The Michigan legislation adjusts to inflation based on the Consumer Price Index (CPI) which most economists believe overstates inflation. The state should use the Personal Consumption Expenditure (PCE) index, which is more accurate.
At the end of the day, Sherk said, increasing the minimum wage is a poor way to help poor people.
"The average household income of a minimum wage worker is $55,000," he said. "That's because they are usually the second or third income earners."
Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.