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No such thing as a free lunch

POSTED: June 5, 2014 6:25 p.m.

Two weeks ago, voters in Switzerland voted by an overwhelming 76 percent to 24 percent to reject the establishment of Switzerland’s first minimum wage. The proposed wage floor was about $24 per hour and would have been the highest minimum wage in the world if the referendum had passed.

A large part of its rejection at the ballot box was a strong informational campaign by employer groups who explained that such a high minimum wage would mean many lower-wage workers losing their jobs. This election result is in keeping with some polling here in the U.S. that a majority of people do not support raising the minimum wage once the cost of such measures is understood.

Polls in the U.S. consistently show that a majority of people favor raising the minimum wage. This is partially abetted by the well-organized union campaign being made to look like a popular uprising in the fast-food industry for higher wages. Mainly funded by the Service Employees International Union and often even paying people to play the role of strikers and picketers, these actions help convince people that supporting an increase in the minimum wage is the right thing to do.

Support for a higher minimum wage in the polls is also aided by the way the question is typically framed. For example, a recent Reason-Rupe poll of 1,003 American adults found that 67 percent of respondents supported raising the minimum wage when the question was: “The federal minimum wage is $7.25 per hour. Do you favor or oppose raising the minimum wage to $10.10 per hour?”

However, support for raising the minimum wage dropped to 39 percent with 58 percent opposed when the question was changed to: “What about if raising the minimum wage caused some employers to lay off workers or hire fewer workers? Would you favor or oppose raising the minimum wage?”

If the question was phrased as: “What about if raising the minimum wage caused some employers to raise prices? Would you favor or oppose raising the minimum wage?” the results were split with 51 percent in favor and 46 percent opposed to raising the minimum wage. This is a statistical tie given the poll’s margin of error of plus-or-minus 3.6 percent.

In reality, raising the minimum wage from its current $7.25 per hour to $10.10 per hour will cause all of these negative effects: employers will lay off workers, hire fewer workers and raise prices. In fact, when the same Reason-Rupe poll asked people how they thought businesses would pay for an increase in the minimum wage, 38 percent of respondents expected business to raise prices, 32 percent thought some workers would lose their jobs, while only 24 percent thought the increase would be paid for by either lower corporate profit or reduced executive salaries.

These poll results mean that once people stop to think about it, they realize where the money for a minimum wage increase will come from: mostly from workers and customers. Seattle is close to increasing the city’s minimum wage to $15 per hour over the next three to seven years, but that is being accomplished by the city council, not directly by voters.

To be fair, the voters elected politicians who promised to raise the minimum wage, but those politicians certainly did not promise that the result of a higher minimum wage would be lost jobs and higher prices.

Economists are famous for saying there is no such thing as a free lunch. By this, we mean that everything has a cost even if sometimes the cost is hidden. Free lunches only appear free. The extra cost of a fast-food meal will not be listed on the menu as due to the increase in the minimum wage, but it will be there nonetheless. People not hired because their output is not worth enough to justify paying a newly-increased minimum wage will be hard to identify, but they will exist nonetheless.

The polls show most people support raising the minimum wage when it is presented as a free lunch, with no downside. Once people make the link between the benefit (higher pay for some) and the cost (fewer jobs, higher prices), the level of support shrinks to a clear minority. Unions and other liberal advocates for the poor can fool people with their slick media campaigns for a little while, but once educated, Americans (and the Swiss) are smart enough to see that the minimum wage is a very expensive lunch indeed.

This commentary by Jeffrey Dorfman, a University of Georgia professor of agricultural and applied economics, originally appeared in Forbes.com and is published with permission by the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians.

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