Will the Increase Make a Difference?

James Dorn, director of the Cato Institute's annual monetary conference and editor of the Cato Journal, says the minimum wage increase will leave small businesses feeling the pinch.

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FARAI CHIDEYA, host:

And for a different take on the minimum wage increase, we've got James Dorn, editor of the Cato Journal at the Cato Institute, a libertarian think tank. Dorn is also director of the group's annual monetary conference. Thanks for coming on.

Mr. JAMES DORN (Editor, Cato Journal, Cato Institute): You're welcome.

CHIDEYA: So, what effect do you think this new policy will have on the economy?

Mr. DORN: Well, it would be wonderful if the Congress could just wave a wand and pass a high minimum wage law and eliminate poverty, but unfortunately that's not the case. In fact, studies has shown that the net effect of a minimum wage is actually to slightly increase poverty because people in the lowest skill brackets are the ones that usually lose their jobs first if the minimum wage is increased, especially in low-income states in the South. Also…

CHIDEYA: One second - can you explain exactly how that happens? Who was replacing these workers or are jobs eliminated?

CHIDEYA: Well, jobs are typically eliminated, not initially but over the longer period of time. Now, of course, the minimum wage hasn't been increased for 10 years so market wages typically exceed minimum wages. So this law probably won't have much of a negative effect on employment but it could over time if it's continually increased or if it's indexed.

The problem is, is that the cause of poverty is not a low-wage rate. That's true by definition. The cause of poverty is low productivity due to inadequate education or possibly dysfunctional family life or high crime rates so businesses won't move into the inner city and so on. And the minimum wage does nothing to change a person's education. A person's productivity does nothing to change the underlying causes of poverty. So there are alternatives that I think are much superior to a minimum wage, which simply interferes with the freedom of contract between the worker and the employer.

CHIDEYA: You talk about a freedom of contracts, but one of the issues that we talk about here on NEWS & NOTES - and I'm sure that you study - is the fact that there's 11 million undocumented workers in the country. Couldn't that also be a cause of how wage stagnation happens for lower-income Americans?

Mr. DORN: Well, I think what - increase in the legal minimum wage will actually do is increase the demand for illegal immigrants because they will work for less than the minimum wage. And then nobody's forcing them to do that, and the employers are breaking the law if they hire them, but there's an incentive for this to occur. And I think this increase will simply foster that type of activity.

CHIDEYA: Now, there's a tax relief provision for small businesses that's part of this. The Democrats say it's going to help companies that might feel a pinch from the wage hike. What do you think about that aspect?

Mr. DORN: Well, that's a plausible argument. The firms that are hurt the most by the minimum wage hike are small businesses. Your McDonald's and Wal-Marts and so forth are paying more than the minimum wage anyhow, and you're going to find that small businesses in rural areas are harmed the most. So if they get a tax break, it might make the effect less onerous.

Also, the numbers that the congresswoman gave, that 12 million people would benefit are highly inflated. The Labor Department, a couple of years ago, estimated about a half million people would benefit, who are now at the 5.15 wage. A lot of the people that are below 5.15 are exempt from the minimum wage. For example, farm workers, waiters, and so on. So I think the positive effects are highly exaggerated.

CHIDEYA: Very briefly, super briefly, what do you recommend then?

Mr. DORN: Well, what I'd recommend is like Hong Kong has no minimum wage. The market set the wage rates. If the minimum wage is too high, people are going to lose their jobs, so why fool around with the wage rate. People's incomes are low because their productivity is low. So I think we need to focus on education, more open markets, and other things that individuals or families or churches or the private community can do to help improve the atmosphere for businesses to work in the inner city.

CHIDEYA: James, thanks so much.

Mr. DORN: You're welcome.

CHIDEYA: James Dorn is editor of the Cato Journal at the Cato Institute, a libertarian think tank based in Washington, D.C.

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