The Badger Herald: ‘Free market fundamentalists’ wrong on minimum wage
media mentionBy Aaron Loudenslager
The Badger Herald
Apr 22, 2013 6:00am
Some debates are perpetual in nature. The never-ending debate about whether or not the minimum wage is good economic policy is one of them. Regardless, it is a debate I find intriguing and one I feel obligated to enter. Contrary to the assertions of free market economists, writers and pundits, the minimum wage helps American employees, consumers and the overall economy. As such, it is time for Congress to raise the federal minimum wage.
In 2011, according to a report issued by the Bureau of Labor Statistics, 3.8 million American employees were paid hourly wages at or below the federal minimum wage of $7.25 per hour. In contrast, according to a recent Wall Street Journal op-ed by consumer advocate Ralph Nader, the CEO of McKesson Corp., John Hammergren, makes approximately $63,000 per hour.
Fortune 500 Company CEOs are doing extremely well, but the corporate entities they work for are doing even better. For example, a study by the Government Accountability Office demonstrated that two-thirds of American corporations paid no federal income tax between 1998 and 2005. Furthermore, a study by Citizens for Tax Justice and the Institute on Taxation and Economic Policy showed that 30 Fortune 500 corporations paid a negative income tax rate between 2008 and 2010.
What do these facts tell us? In the words of a 2005 Citigroup memo, the United States is a plutonomy. According to Investopedia, a plutonomy is defined as a society where “economic growth … is powered and consumed by the wealthiest upper class of society.” The assertion from free market economists, writers and pundits that the minimum wage harms job creation and the overall economy is not based in the facts of reality.
Free market economists argue that the minimum wage is destructive because of their fundamental misunderstanding of neoclassical economic models. In a first year college economics course, the professor will draw a basic supply and demand curve for labor, showing the market wage for labor. Next, the professor will draw a wage floor (government-mandated minimum wage) that results in a higher wage, but subsequently results in unemployment (excess labor supply). This economic model is erroneous.
First, this model — like most economic models — is based on the assumption of perfect competition. But any serious economics professor has to admit that perfect competition does not exist in the real world. Instead, the real world is dominated by oligopolies and oligopsonies — market structures subdued by a few sellers or buyers of a certain good. Second, this model is based on the assumption of perfect information, where all firms and employees “have equal and transparent knowledge of the relevant factors.” But the notion of perfect information has been disproved by Nobel laureate Joseph Stiglitz. Instead, as Stiglitz has demonstrated, information asymmetries pervade in nearly all markets. Thus, this basic economic model doesn’t accurately describe the effects of a minimum wage.
In a column for TheStreet.com, Robert Weinstein wrote “the reality of a minimum wage is zero benefit for those earning it, and a negative benefit for everyone else.” This simply isn’t true. Consumer spending constitutes approximately 70 percent of the American economy. Without adequate consumer spending, an economy can’t function properly. This is the basic foundation of Keynesian economics — spending drives economic growth, not tax cuts for job creators. Thus, if we want the U.S. economy to expand, we must raise the minimum wage.
An increase in employee wages increases consumer spending and, as a result, increases economic growth. As Nader noted in his Wall Street Journal op-ed, “a [2011] Chicago Federal Reserve study showed that for every dollar increase in the hourly pay of a minimum-wage worker, the result was $2,800 in new consumer spending from that worker’s household over the year.” In addition, a report by the Economic Policy Institute said, “Increasing the federal minimum wage to $10.10 by July 1, 2015, would raise the wages of about 30 million workers, who would receive over $51 billion in additional wages over the phase-in period [from 2013 to 2016].” Furthermore, in the same report, the EPI said that an increased federal minimum wage “would increase [GDP] by roughly $32.6 billion, resulting in the creation of approximately 140,000 net new jobs (and 284,000 job years).”
Free market fundamentalists, including economists and pundits, are wrong in their assertion that the minimum wage is detrimental to job growth and the overall economy. This assertion is based on a flawed economic model and does not coincide with the empirical facts. Instead, it demonstrates a view best summed up by stand-up comedian George Carlin: “Conservatives say if you don’t give the rich more money, they will lose their incentive to invest. As for the poor, they tell us they’ve lost all incentive because we’ve given them too much money.”
Aaron Loudenslager ([email protected]) is a first year law student.