It is understandable how most people get caught up with the moral argument for minimum wage. The poor make too little to live, they argue. And the easiest solution is for government to force employers to pay more. Perhaps they’ve heard the economic arguments against it, but choose to doubt such assertions in favor of “morality”. Shamus Khan of TIME Magazine, on the other hand, chooses to ignore Econ 101 altogether. In his article titled, “The Promise of More: Why We Should Raise Minimum Wage,” he somehow argues that minimum wage is good for the poor and good for economic progress. When you choose to ignore common-sense economic principles, I guess it’s possible to have your cake and eat it too.
Khan should take a lesson from his own statement: “As minimum wage has remained flat, productivity has increased.” Of course productivity has increased without a rise in the minimum wage. Had minimum wage increased, productivity would have decreased or surely increased less. That’s the fact of economics: it is not consumer spending that leads to economic growth and prosperity; it is the accumulation of capital and capital investment that is the engine of the economy. If entrepreneurs have lower labor costs, they accumulate more capital and embark with capital investments that they wouldn’t otherwise undertake (lower labor costs also make more potential ventures profitable). In the long run, this increase in capital investment and productivity leads to higher wages and a better quality of life for all people.
It is easy for some to ignore economic history; however, to understand the facts Khan needs to look no further than the Industrial Revolution in Britain. The country went from a poverty-ridden peasant population to the first thriving, modern economy. Population exploded because industrial prosperity led to less peasants dying from poor living conditions. What would minimum wage laws done to this progress? What if Khan was there to argue: ‘those poor workers need higher wages to live off of’? That clearly would have led to less industrial progress; industrialists would have embarked on less projects because some would have been made unprofitable due to minimum wages; and the projects that did go forward would have resulted in less accumulated capital, decreased the expansion of future projects. So many of those “poor workers” would have ended up returning to their jobs as starving peasants.
It is time for TIME to change its understanding of economic progress and prosperity. Minimum wage doesn’t help the poor; it only slows the growth that leads to economic prosperity and a better quality of life for all people, including the poor.