• Moon Mythbuster

Nancy Pelosi and the wage-control specter

Updated: Jan 10, 2020

As Democrats and some "democratic socialists" took the House in 2019, legislators could hurt job growth by increasing wage controls.

by Samantha Medasie

As the Democrats have taken control of the House of Representatives in 2019, and with a number of so-called “democratic socialists” representing the American people, we have seen fiscally liberal bills introduced in the House — they passed the Climate Action Now Act, which the Senate promptly blocked — not to mention the regulation-happy Green New Deal proposal. These environmental bills are also fundamentally economic, and we can expect more, especially if the Democrats gain ground in 2020. In fact, as many cities and states around the country raise the minimum wage, a similar attempt on the federal level could soon come to fruition.

What is the role of the government in this debate?

Though partisan debate exists regarding the role of the United States government, the Constitution states that one of its basic functions is to promote the general welfare; thus, the government does have a moral obligation to improve the standard of living for impoverished citizens, but increasing the minimum wage might not be the best way to do so.

Is the minimum wage effective as an antipoverty policy?

Research by Thomas MacCurdy[1] states that supporters of an increase in minimum wage rely on the policy's "appeal as an antipoverty policy." He argues that in order to consider a minimum wage increase an antipoverty policy, it must not only increase the incomes of underprivileged families, but also refrain from imposing public or social costs that outweigh the benefits. Using these criteria, MaCurdy evaluates the effectiveness of minimum wage increases as antipoverty efforts and ultimately determines them not effective as antipoverty policy. According to MaCurdy, low-wage families are not synonymous to low-income families.

In his study, he found that one in four families in the bottom fifth of the income distribution have a low-wage worker; however, one in four families in the top fifth of the income distribution also have a low-wage worker. Thus, increases in minimum wage do not increase the earnings of impoverished families any more than they increase the earnings for families in the top 5 percent of the income distribution. Additionally, MaCurdy found that the higher prices that result from increases in minimum wage are paid in what he dubs a "national consumption tax." This unofficial tax causes more impoverished families to lose resources rather than gain them.

Moreover, as many rich families gain resources as do poor families. Minimum wage increases may result in increased incomes for some families, allowing them to escape poverty; however, this policy leaves other families unemployed and consumed by the cycle of poverty. This unintended consequence is a result of a labor surplus created by the minimum wage acting as a price floor in the labor market. When more labor is supplied than demanded, workers may lose their jobs. According to one article[2], impoverished individuals suffer from a lack of access to quality education, which could hinder their escapes from poverty. They are also more likely to experience poor health and become victims or perpetrators of crime. Supporters of minimum wage increases often point out that the families experiencing higher incomes outnumber the families that are left trapped in the cycle of poverty, but this is proved untrue by MaCurdy's research. No matter how much or little the number of unemployed families increases, the fact of the matter remains that minimum wage increases do cause some families to become ensnared in the negative repercussions of poverty.

Is government interference in the free market ethical?

The government has a moral obligation to improve the standard of living for its constituents, but it can be argued that government interference in the market is unethical. Because the government, rather than free-market principles, is determining the level of compensation for labor, it is single-handedly responsible for the families trapped in poverty as a result. In other words, by interfering with the unbiased free market, the government is indirectly hand-selecting each family that becomes unemployed as a result of this policy. It is unethical for the government to prioritize the escape from poverty of some families over the further detriment of others. It is also unethical for the government to falsely label minimum wage increases as antipoverty efforts to gain political support and credibility. Rather than enacting an ineffective and misleading minimum wage increase, it is intelligible for the government to allow the market to determine which families — there will always be at least a small percentage — are left unemployed and impoverished. Instead, the government can and should invest in education and training and implement policies that incentivize businesses to create more jobs.

Will this policy actually come to fruition?

Thankfully, our Republican president and Senate majority will undoubtedly opt to uphold the current federal minimum wage, saving business owners and workers alike from further financial hardship — for now. But President Trump and Senate Majority Leader Mitch McConnell had better watch out — just as the 2018 midterms did, elections in 2020 and 2022 could alter the balance of power and threaten the country’s strong employment numbers.

[1] MaCurdy, T. (2015). How effective is the minimum wage at supporting the poor? Journal Of Political Economy, 123(2), 497-545.

[2] Effects of Poverty. (2016). http://richmondvale.org.

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