Be Careful on the Minimum Wage Jude Wanniski September 12, 2000

To: Senate Minority Leader Tom Daschle
From: Jude Wanniski
Re: Hiking the Minimum Wage
Cc: Rep. Charles Rangel [D-NY]

In your appearance on Sunday’s Face the Nation, Senator, you questioned the “price” in small-business tax cuts that the Republican leaders are asking if they are going to give you the $1 per hour increase in the minimum wage that you and the President would like. You indicated the “cost” of the tax cuts would be something more than $75 billion over a 10-year period, as if this were an enormous amount of money to ask in exchange for benefiting the 11 million Americans who would get an hourly wage increase, courtesy of Democratic generosity.

You’ve of course heard almost all the arguments on both sides of this issue in your political experience. You know the Republicans say it will force marginal businesses into bankruptcy and the people they employ will be unemployed, earning zero per hour. You know your Democratic advisors say it is good for the economy to have low-income workers making another $1 an hour and increasing their spending, which makes up for any unemployment that might result from the marginal employer being put out of business. In the last quarter century, as a matter of fact, the periodic increases in the minimum wage were accompanied by economic expansions, which makes you and your fellow Democrats think your generosity works and the GOP stinginess only impedes progress.

To tell you truth, I have not opposed any of the last several increases in the minimum, and in fact assured Senate Majority Leader Trent Lott in 1996 that we could safely increase the minimum without doing any damage to the economy. My argument was one I’m sure you have never considered. I told him the dollar price of gold had climbed so high -- to roughly $380 -- that the $4.85 per hour wage was so low that almost no employers would be able to find workers willing to work at that pay. That is, the market for workers would clear above that level anyway, so putting it up to $5.35 would only cause unemployment in rural areas and small towns where the cost of other factors of production made the higher rate impossible. Senator Lott’s own state of Mississippi would feel the burden far more than the industrial states of the Northeast, Midwest and West Coast. My own state of New Jersey would not be affected adversely by a $5.35 rate because even hamburger flippers at Burger King could not attract workers at that level.

This is why I think you must be more generous this go-’round with the tax cuts the Republicans want in order to offset a hike to $6.35 per hour. Four years after the last increase, the price of gold is now at $275, not $380. If you don’t think the dollar price of gold has any meaning, you will of course say “So what?” But if you have some respect for the argument that the decline in commodity prices over the last four years has been the result of deflationary monetary errors by the Federal Reserve, it might get you thinking about a connection to the minimum wage and why you should be careful about raising it by a dollar, at least not without offsetting it with the kinds of measures the Republicans are asking in exchange. Put it this way: In 1996, when gold was $380, it took 71 hours at $5.35 to buy an ounce of gold. In 2000, it only takes 51 hours to buy an ounce of gold at $275. If you raise the minimum to $6.35, it will take only 43 hours of work to buy an ounce of gold.

Now you might think this is wonderful. Just keep raising the minimum and pretty soon an entry level worker can sweep out the store and have enough money to buy an ounce of gold. I’m afraid it does not work that way, Senator. At the moment, even though the national economy is in a relatively robust phase, another dollar on the minimum will cause significantly more distress to small businesses -- especially in small towns and rural America -- than the last hike did in 1996. If you keep your eye on the gold price, it may decline even further, if people in this expanding economy need more liquidity from the Fed than it is willing to supply. The folks at the top of the pyramid will not feel a thing, but the unemployment rate will increase at the bottom.

You will note I am sending this memo to Charlie Rangel. That’s because I did go through it with him a year or so ago, in his office, as a cautionary warning. In a market economy, it is very dangerous for the government to fool around with market prices. If the government decrees that the price of tomatoes cannot fall below 50 cents a pound, but the market price is $1 a pound, there is no problem. If the government says the price of tomatoes cannot fall below $1 a pound when the market price is 50 cents, then there is a big problem. The same is true with the marginal cost of labor. As I told Charlie Rangel, if the economy turns south when the minimum wage is $6.35, the black teenage unemployment rate will head north, and so will the national crime rate. So be careful.