Minimum Wage, Productivity, and the Poor

In Bloomberg, Noah Smith has an opinion piece on one of the speculative (his word) benefits of minimum wage: increasing productivity.  This article isn’t perfect.  He has some glaring errors in it, but I don’t want to talk about that (over at Cafe Hayek, Don Boudreaux has done a good job addressing several).

Rather, I want to praise Smith.  He recognizes something that most proponents of minimum wage don’t: minimum wage costs jobs.  After all, that is what increased productivity is: it is using fewer inputs (labor) to achieve the same or a greater result.  Smith points out that minimum wage workers are replaced with machines when wages are hiked.  He puts a positive spin on this, and I’ll let you judge for yourselves whether he is right or wrong, but I am glad he is recognizing this reality.  Bravo!

But what does this mean for minimum wage as a poverty fighting tool?  Well, if Smith is right, it means minimum wage is rather ineffective.  In fact, it would likely work opposite.  Workers are replaced (or lower demand for their services).  This means the low-skilled will have an increasingly difficult time finding jobs with a minimum wage.  Sure, those who are able to keep a job are better off (as Smith suggests), but those who cannot currently get a job, or who are marginal, will be out of luck.  If the goal of minimum wage is to help the least advantaged, then it will fail, according to Smith.  In fact, those most likely to benefit are the owners of capital.  Potentially, if Smith is correct, this would increase income inequality, not lower it!

In general, minimum wage is a poor poverty fighting tool as it only affects a select few.  But, if labor is indeed replaced by capital, then this suggests minimum wage could be a poverty creating tool.

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