Princeton economist Alan Blinder says raising the minimum wage would help low-skilled workers. Economic theory shows the exact opposite.
According to Princeton University economics professor Alan S. Blinder, writing in the Wall Street Journal, Kamala Harris is entirely correct in her intention to raise the federal minimum wage from its present “paltry” level of $7.25 per hour. In his view, an hourly $12 would be far more like it. His main argument is the “humanitarian case,” that the existing level “is insufficient to support ‘a decent quality of life.’” Mr. Blinder regrets that the tax transfer system will not adequately address “income inequality” and relies upon this legislative enactment of “predistribution, that is reducing market inequalities rather than trying to equalize incomes at a later date.”
There is more wrong here than you can shake the proverbial stick at. He offers no argument that income inequality is too high, nor that it would be justified to forcibly take money from the rich to give to the poor to ameliorate this situation. Moreover, his championing of the minimum wage law would increase wealth disparity, not reduce it. How so? In order to see this, we must ask a more basic question: What determines wage levels in the first place? And the answer is discounted marginal revenue product, or productivity, for short.
Suppose my productivity is $5 per hour. That means that for every 60 minutes I am on your shop floor, your revenue increases by precisely that amount. You would not pay me more than that amount, because if you did, you would lose money on the deal. If my wage were $6 per hour, you would be out of pocket for $1 each such time period. But my wage, at least in equilibrium, cannot be any less than that amount either. For example, if you pay me only $3, you earn a pure profit of $2, and other competing employers will bid my wage up to that amount, again, in equilibrium. There is no guarantee that I will always and ever earn that exact amount, but powerful profit and loss market forces will continually work to push me in that direction.
Why, then, do rock stars, top professional athletes, leading lawyers, and engineers earn skyrocketing salaries? It is because their productivity is so high, not because of employer generosity. Why is it that middling professors, journalists, accountants, nerds, and managers take home middle-class compensation, roughly in the low six figures? This is due to the fact that their contribution to the economy is significant, but more modest. What of the people who push brooms or ask if you “want fries with that”? Their pay is even less because the amount of cash they earn for their employers is lower.