Acton Institute Powerblog

Minimum Wage OR Minimum Unemployment?

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Various forms of government intervention negatively affects economic vitality in many ways, however few policies impact the market as directly as wage laws. The $15 minimum wage law in Seattle dramatically influences determinants of business owners’ hiring practices. In many cases, wages are the highest economic cost in the production process, making hiring new employees a risky endeavor. Regardless of size, businesses of all scales must turn profits to stay operational and risk potential losses each time they hire new associates. Extra government mandates and regulations only make this natural market process more onerous.

While wage laws intend to immediately increase pay for the working poor, they severely hinder not only full time employment, but employment itself. Government mandated wage policies erect an artificial economic barrier that increases the supply of, but reduces the demand for, labor. Minimum wage mandates, contrary to their original intent, directly harm the groups they are designed to help. Government intervention in business typically aims to cure certain social ills, but the Utopian desire to cure humanity of all suffering leads to various economic distortions, sending false signals to consumers and producers. This is especially evident in wage policies.

Minimum wage laws primarily target the working poor, about 2% of the working population. Typical of intrusive government intervention, rather than having little to no effect, the laws have an active negative effect. As a labor demographic, the poor are least likely to possess marketable skills necessary to higher level employment and often rely on low-wage, unskilled jobs before developing their talents. When government forces business to pay above the market rate for unskilled work, this results in unemployment of the poor. Minimum wage laws price the poor right out of the labor market and rob them of work that may potentially lead to greater opportunity. African American communities particularly suffer from wage controls. Noble Prize economist, Milton Friedman, dispelled the incorrect perceptions of minimum wage laws in the 1960s and 1970s saying, “the most anti-negro law on the books of this land is the minimum wage rule.” The workers who retain their employment undoubtedly benefit from such wage increases, but at the expense of others.

For example, the current minimum wage in Michigan is $8.15 an hour. A young black teenager from the inner city of Detroit offers little to employers after condemnation to 12 years of inferior government schooling. He may be perfectly willing and able to work, but only possess skills valued at six or seven dollars an hour. Despite a desire to work, hiring such a candidate and paying under minimum wage is illegal. Suddenly this candidate, who only delivers six or seven dollars of value in productivity, must now produce $8.15 of value in order to retain profitable employment. Employment now becomes much more competitive and businesses adapt through hiring only those who produce in value the newly mandated labor cost. Businesses are generally not positioned well enough to hire numerous employees who are unable to increase profitability. Young, poor black Detroiters, deprived of the opportunity of a first job, may never find a chance to escape poverty. The first job for young people is critical, impressing upon them attitudes and skills often transferable to better jobs. Minimum wage laws however, price this labor demographic right out of the market.

How can such policies be morally justified when a worker’s future may rest with a low-wage job? The poor deserve employment no more or no less than anyone else, but supply and demand determine the “price” of wages just like goods and services. When the price of labor (wages) rises, demand for labor declines. Employers adjust to arbitrary government fiats through hiring less, laying off workers, or cutting hours. In some cases, employers may prefer to invest in machinery or equipment to entirely replace certain positions in the long run. Unemployment in the long run and the short run increases. Government decrees of value will not marvelously increase wages of the poor contrary to what employers are willing and able to pay.

The $15.00 minimum wage in Seattle threatens the city with financial ruin. Multiple businesses within the city reacted predictably. They plan to reduce their labor force, cut hours, close locations, and increase their prices. Such a strong wage hike vastly exceeds the market rate for unskilled labor and will radically increase the unemployment rate for young, poor workers. Most striking about minimum wage law proponents is their implicit knowledge of the policy’s ineffectiveness. If minimum wage works so well, then why stop at $8.15 or $15.00 an hour? Why not $100 an hour? Surely such an earning would erase poverty. Through this lens one truly sees the absurdity of minimum wage.

Minimum wage policies carry with them multiple unintended consequences. Only 1.6 million workers in the US are paid minimum wage, so overall unemployment rates remain relatively stable, but the law disproportionately affects the poor, the unskilled, and the young specifically. Those who care for the poor and the future of the labor market, the young job seekers, must critically analyze the effects of minimum wage laws. They kill jobs and confine the most vulnerable of us to misery and destitution. Rather than providing a solid wage employers are willing to pay workers, minimum wage essentially endows the economy with minimum unemployment. Removing these barriers to entry could unleash a storm of creativity and productivity.

 

Mike Raths

Comments

  • You’re right! But if the gov’t doesn’t have min. wage laws, how is it helping the poor worker???
    For political success, there should be a gov’t program that helps increase employment AND helps increase take home wages.

    The US Fed gov’t should subsidize all legal jobs, at any wage above $6/hr, with 60% of the difference between the employer paid amount and the $15/hr target.
    So: $6/hr, 60% of (15-6=9) = 5.4, employer pays 6, gov’t pays 5.4, total pay: $11.40/hr
    Or: $10/hr, 60% of (15-10 = 5) = 3, total pay = $13/hr = 10+3
    Legal, low wage American workers get paid by their employers AND the gov’t, for working.
    They gain better work habits, experience, and should expect to advance over time — or not.

    Maybe one of the dirty secrets in poverty is that there are a lot of people who, even if they show up for work, really aren’t worth more than 6 or 8 or 10 $/hr. This type of gov’t supplementary income helps such folk stay in the job force doing work, even if low value, rather than welfare/ crime.

  • Wm. Higley

    I do not believe the ‘government’ should’ve in the wage, banking, or health care market. Establishment and enforcement of reasonable laws of the land is the ‘government’ job, not coddling everyone who wants a hand out.

  • Haze

    I’m no expert, but some brief research on this topic suggests it is a lot more complex than the simplistic argument presented here.

    Companies pay people far more than the value they contribute all the time: many executives receive far more pay than they are probably strictly speaking worth.