Minimum Wage Insanity in Illinois

With a hat tip to a student of ours who took our Public Policy class, a story about the consequences of having a state government dominated by liberal Democrats.

From the Daily Herald:

Is minimum wage costing businesses state contracts?

Governor pushes for higher pay then outsources jobs to states with lower wages

BY JOHN PATTERSON
DAILY HERALD STATE GOVERNMENT EDITOR

SPRINGFIELD - Illinois’ minimum wage shoots up to $7.50 an hour today, a move heralded as helping working men and women by the Democrats who pushed it, but which ironically may have cost a suburban company two state contracts and eliminated dozens of downstate jobs.

Hoffman Estates-based Rely Services has a data-entry center in downstate Carlinville, which for years held state contracts to manually input tax and vehicle data.

But in bidding to keep those contracts, the company was undercut, in part, its officials say, because out-of-state firms can pay their employees a lower minimum wage. As a result, the center that at its peak employs 134 will see its workforce plummet to 14 on Monday.

“It’s been a pretty sad day,” production manager Brenda Witt told the Daily Herald last week as employees were finishing their final days at work.

The work those employees had done now will be handled by firms based in North Carolina, Michigan and Indiana, all of which have lower minimum wages than Illinois.

Democratic Gov. Rod Blagojevich led the push to raise Illinois’ wage, the second such increase since he first took office in 2003.

Today’s $1-an-hour increase is only the beginning. Three more 25 cents-per-hour increases are scheduled to take effect. In 2010 the minimum wage here will be $8.25, which translates into $17,160 a year.

“I’m proud that in Illinois, we’ve kept our promise to help working people and make their lives easier after years of neglect at the federal level. As Illinois’ minimum wage moves up to $7.50 an hour . . . it will be a little easier for thousands of Illinois families to pay their bills, put food on the table or buy clothes for their kids,” Blagojevich said in a news release.

Blagojevich appears oblivious to the consequences of mandating a higher minimum wage. Making Illinois firms uncompetitive is just the beginning.

Further job losses are guaranteed as managers substitute capital for labor -- buying more machinery (and more sophisticated machinery) so they can hire fewer workers. And as the price of goods and services go up, people will consume less of the things that are heavily dependent on entry-level wage labor.

When the increase was debated late last year, some Republicans and business groups complained that the move tips the economic landscape against Illinois and would drive businesses out. If the minimum wage was going to be increased, it should be done nationwide to ensure everyone played by the same rules, they argued.

It seems they didn’t have the guts to flatly say any minimum wage anywhere is a bad idea. But we can hardly blame them. When your business is on the line, it’s hard not to compromise and say things that are politically palatable.

But, of course, raising the national minimum wage simply makes the U.S. less competitive in international markets. Poor countries have plenty of workers who are happy to work for far less that the U.S. minimum.

Earlier this year, a new, Democrat-controlled Congress did just that, sending President Bush the first minimum wage increase since 1997, which he signed.

But the federal wage, which is the lowest level any state can have, will only increase to $5.85 this summer from the current $5.15. It’s scheduled to increase incrementally to $7.25 by 2009.

In contrast, Illinois’ new minimum wage is among the highest in the country.

“We’re definitely one of the more progressive states in this regard,” said Illinois Department of Labor spokeswoman Anjali Julka.

The governor’s office referred minimum wage calls to Julka. She said she was unfamiliar with the Rely Services situation but that the wage increase is estimated to benefit nearly 650,000 workers.

Note that she assumes that each and every worker will keep his or her job.

She said any impact on businesses should be minimal because minimum wage earners represent just a small percent of the workforce. Illinois has nearly 6 million workers, excluding farm jobs.

But in Carlinville - population 5,685 - the data processing center is among the largest employers.

Witt said the center was typically staffed with working moms and high school and college students attracted by the flexible hours.

Rely officials said they don’t necessarily object to a higher minimum wage, so long as Illinois businesses aren’t penalized in the process. But by focusing only on raising the minimum wage, Neil Khot, owner and company president, said Blagojevich is essentially giving Illinois work to other states.

“He’s saying, ‘I’ll increase my rate for my people to $7.50,’ whereas the other states are at $5.15,” Khot said. “Not protecting the borders is becoming a bigger issue.”

Khot and Witt said they’d like to see Illinois give preference to businesses with an Illinois presence. Currently, the state only gives preference to minority or female bidders and some small businesses.

Indiana, on the other hand, gives in-state businesses preference on state contracts and has set a goal of having 90 percent of all state business done in Indiana. Officials there project it’d keep more than $1 billion within the state economy.

In Illinois, however, the idea’s gained little traction. An Illinois Senate task force has been assigned to look at the issue, but its report isn’t due until the end of 2008.

“And how many businesses,” Witt said, “are going to be out of the state by then?”

This is utterly typical in public policy debates.

One very bad, but popular, policy is implemented. It has negative effects. So another bad program is put into effect to mitigate the bad effects of the first bad program.

Affirmative action for in-state firms is guaranteed to cost taxpayers a pretty penny. Quite often the most efficient firm with the best product is out of state.

Further, the implicit subsidy given to in-state businesses is not targeted at poor workers. It goes to all workers -- including very well-paid managers -- and to owners. And it especially goes to firms who know how to “play the game” and seek political favor. It discriminates against firms who only know how to make a better produce cheaper.

The way to help low-income workers is the Earned Income Tax Credit. It subsidizes employment without distorting labor markets. If the market dictates that unskilled entry level workers can only demand $5.15 per hour in wages, that’s what people get paid. Then government chips in several thousand dollars per year for a full-time worker making this wage.

So why do Democrats want to increase the minimum wage?

It’s their dirty little secret. They want to regulate the economy for the purpose of regulating the economy. They want to shift economic decision making out of the market and into the hands of legislators and bureaucrats. They don’t, really deep down care what the consequences are.

Lately, liberal Democrats have been crowing about the fact that a majority of Republicans don’t believe in evolution. What a bunch of ignorant rubes, they say.

(Let’s leave aside, for the moment, the fact that about 40% of Democrats don’t believe in evolution.)

When the issue is economic regulation, it’s the Democrats who are ignorant rubes.

Finding an economist who is in favor of the minimum wage is about as hard as finding a biologist who doesn’t believe in evolution. They exist, but they are very rare and on the margins of the profession.