When government denies workers and employers the freedom to determine wages for themselves, the result is a gap in supply and demand... A Worst-Case Scenario for Federalism:
Massachusetts and the Minimum Wage

By Alexander Schwab

Supreme Court Justice Louis Brandeis’ conception of individual states as "laboratories of democracy" would aptly describe Massachusetts should its legislature pass a bill raising the state minimum wage from $6.75 to $8.25. Sadly, this is one experiment destined to go up in smoke.

Originally introduced by Senator Marc Pacheco and State Representative James Marzilli (both Democrats), the legislation, in addition to raising the minimum wage by $1.50, would contain a cost-of-living clause as a buffer against the erosive effects of inflation. If the bill is enacted into law, Massachusetts will have the highest state minimum wage in the country, dwarfing the federal standard of $5.15 per hour.

Unfortunately, there are no winners with the minimum wage. The resulting increase in unemployment, taxes, consumer costs and crime touch all rungs of the social ladder. Whether you are concerned with improving the lot of the impoverished, increasing entrepreneurship or simply advancing your own self-interest, the minimum wage is an insidious obstacle to American progress, as Massachusetts will undoubtedly prove if it passes the wage hike.

Any introductory economics textbook will explain the necessary unemployment caused by the minimum wage. When government denies workers and employers the freedom to determine wages for themselves, the result is a gap in supply and demand: prospective employees flock to the attractive wages offered by even low-level positions while business owners simultaneously eliminate jobs that become so costly as to be unprofitable. Most disturbingly, though, those who will be edged out in this constricting job market are Massachusetts’ least advantaged citizens–the very individuals the state legislature hopes to aid.

Those lacking education or experience find themselves particularly expendable when unemployment rises. Some slots are lost to more qualified job seekers, who crowd out their less credentialed competitors in the pursuit of artificially inflated wages; other jobs are eliminated altogether when businesses implement cost-cutting measures. A Beacon Hill Institute study has determined that, all told, almost 27,000 workers–roughly 10 percent of the minimum wage labor force–would lose their jobs as a result of the wage hike.

Additionally, for those without a college education or even a high school diploma, working a minimum wage job can be an investment in the future, providing the possibility of advancement and the career experience necessary to land a decent salary later. The notion that many Americans must support a family while earning minimum wage is a myth. In fact, according to the U.S. Bureau of Labor Statistics less than 2 percent of hourly workers age 25 and older are minimum wage earners. And of minimum wage earners in general, over 95% are teenagers, workers in training, college students, interns and part-time workers–the very people who can best use a low-paying job as a bridge to a legitimate career.

All of these problems are exacerbated, of course, when we take into account the fact that employers can uproot when confronted with an unfavorable business environment. Some firms may begin to outsource their low-skill labor to foreign nations in order to avoid the high costs of doing business where the minimum wage is $8.25. But especially in the case of Massachusetts, competition for business may stem not from overseas, but simply across the state border. New Hampshire, lying just to the north, offers a minimum wage of only $5.15, a strong incentive for any firm to move without having to forfeit the New England consumer base. The ease of shifting labor to a neighboring state with a more welcoming business climate becomes all the more real when we consider the relatively small size of Massachusetts, which makes the cost of escaping the state’s severe minimum wage simple in comparison to larger states.

Of course, minimum wage laws are not without their cost to the general public, as well. When labor costs rise, businesses bear part of the burden, but substantial portions of the cost are passed on to the consumer. And what becomes of those workers disenfranchised by the minimum wage? They become wards of the state, draining the public coffers while futilely pursuing the economic independence denied them through poor policymaking. Some, forsaking this alternative, will abandon their families or embrace a life of crime. None of these possibilities should be palatable for a free society.

Undoubtedly, the bill’s supporters act from the purest of motives. But when legislation intended to assist the most disadvantaged in society only succeeds in denying them opportunities for employment, its logic must be questioned.

By increasing the minimum wage, the Massachusetts state legislature would be embarking on an experiment in federalism. Too bad the Massachusetts statehouse forgot that the science of the minimum wage has already been debunked.

Alexander Schwab will be a senior at Harvard University this fall and is a Research Assistant with the Center for Individual Freedom this summer.

June 16, 2005
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