Schwarzenegger Wants Economic Miracle

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Libertarians say the governor is hoping for what is economically impossible

Governor Arnold Schwarzenegger last week laid out his sweeping vision for California, with massive infrastructure construction, reduced university system tuition, and rising incomes for all, graciously provided for by him and what is bound to be a most cooperative Democratic-controlled state legislature.

Unfortunately, it's just a pipe dream, says the Libertarian Party of California.

"Two words came to mind when I listened to the Governor's speech," said Libertarian Party of California Chairman Aaron Starr, "Economically illiterate. The simple fact is that raising the minimum wage will not accomplish its intended goal, unless that goal happens to be political. It will give some teenagers living with their parents a boost, because they comprise the largest group of minimum wage earners in the state, but at the expense of other teenagers and adults losing their jobs or having their hours reduced.

"But if you're going to ignore the basic laws of economics, then why stop at $7.75 per hour? I mean, if a dollar is good, then more is better, right? Why not raise the minimum wage to $10 per hour? Heck, let's make it $20 or $25 per hour so we can 'lift people out of poverty!' Other than winning votes, I'm not sure of the governor's reason for doing this because wage controls always clearly do more harm than good."

Most economists agree that increasing the government-mandated minimum wage has a negative effect on employment. Even though some people will earn more because of the increase, others will lose their jobs entirely, and many part time workers will have their hours cut. The net effect is that low wage earners will accrue less total income than before[1][2], and what remains will be less evenly distributed. Many of the newly unemployed end up in costly social programs. With more unemployed young males on the streets, the largest group affected, crime is also likely to increase, with an attendant cost to society.

The loss of jobs has been quantified: for each 10 percent raise in the minimum wage, on average 2.1 percent of the people affected lose their job[3][4]; for women, the effect is even worse[2]. Since about 1.4 million people will be affected by a change in the law[5] the effect of the two 50 cent raises the governor proposes (a 14.8 percent increase) will likely cause about forty-three thousand low wage earners to lose their jobs, and many more to have their hours reduced. The number losing their jobs would be more than the total number of people employed in Mendocino county[6].

"Economic law, common sense and any business owner will tell you that as the price of any good is increased, demand for it will fall," Starr said. "This is true for oranges. It is true for gasoline. It is true for plasma TVs. It is also true for labor services.

"With Arnold's proposal, low wage workers lose. Businesses lose. Consumers lose. Communities suffer. Even the government loses, because tax revenues drop. The biggest beneficiaries are a few union employees already above the minimum who may get a slight pay increase, and the politicians who get reelected by convincing the public they are helping the poor when they are actually hurting them. It would be much more beneficial to respect the rights of people wanting to work by allowing them do so. Only the individual stakeholders directly involved as employee and employer know what's best for themselves. It's arrogant to tell anyone that it is 'for their own good' that they can't work for less than an arbitrarily set minimum wage."

Notes

[1] David Neumark, Mark Schweitzer, and William Wascher. "The Effects of Minimum Wages Throughout the Wage Distribution." Working paper 9919 of the Federal Reserve Bank of Cleveland (1999).

[2] Sabrina Wulff Pabilonia, Ph.D. "The Effects of Federal and State Minimum Wages Upon Teen Employment and Earnings." Bureau of Labor Statistics (2002).

[3] Fuchs, Victor R., Alan B. Krueger and James M. Poterba "Economists' Views about Parameters, Values, and Policies: Survey Results in Labor and Public Economics." Journal of Economic Literature 36 (September 1998).

[4] Neumark, David and William Wascher. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment." American Economic Review 90 (December 2000).

[5] Timothy Roberts and Raksha Varma. "Hike in Minimum Wage Gets Lukewarm Response" Silicon Valley/San Jose Business Journal (http://msnbc.msn.com/id/10771341/).

[6] "Labor Market Information." Employment Development Department, State of California http://www.calmis.ca.gov/htmlfile/sublist.htm).

About the Libertarian Party of California

The Libertarian Party of California represents voters who are socially tolerant and fiscally responsible. Just last year, the Libertarian Party of California helped defeat $4.2 Billion in tax increases.

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Richard Newell