"In the following pages I offer nothing more than simple facts, plain arguments, and common sense; and have no other preliminaries to settle with the reader, than that he will divest himself of prejudice and prepossession, and suffer his reason and his feelings to determine for themselves; that he will put on rather than off, the true character of a man, and generously enlarge his views beyond the present day." - Thomas Paine, Common Sense

Monday, February 18, 2013

Minimum Wage Laws Equal Fewer Jobs

With Obama's recent push for an increase in the federal minimum wage to above $10/hour and Seattle's recent passage of a $15 minimum wage, it's important to look at the consequences of a minimum wage of any (economically relevant) amount. Unfortunately, when one looks at the situation from a logical, supply-and-demand point of view, it becomes obvious that the minimum wage is another example of a law backed by good intentions with unintended, harmful consequences.

Notice the word "equilibrium." That's important.

Firstly, it's completely dishonest to claim that without the minimum wage, we'd all be starving and forced to live off six pennies a day. If a company posted a job for $0.25/hour, I can almost guarantee that they wouldn't get any applications. Labor is a market, and there's a balance. While workers may have to impress employers with their experience and education and such, employers also have to compete for workers. To attract workers to their business, they might offer competitive pay, good medical benefits, advancement opportunities, a good work environment, etc. In a free market, this balance between available jobs and workers is kept relatively stable. It's when the government involves itself through economic regulations like price (wage) controls that the market gets distorted and one group is put at a disadvantage to another.

The problem is that enacting a minimum wage law doesn't suddenly give all the working poor a decent-paying job. Instead, it forces employers to consider many people to be unemployable because their sudden increase in pay may not be justifiable by their production, experience, or education. The increase in pay due to the minimum wage may even make it economically impossible for the business owner to keep that worker's position anyway; what if the job itself just isn't worth $10/hour?

This is the exact reason why proponents of the minimum wage don't follow their logic to its necessary conclusion. Why doesn't Mr. Obama, if he cares about the little man so much, increase the minimum wage to $20/hour? Or $30/hour? Because by raising the minimum wage, the government forces people out of their jobs, and their jobs out of the country. It's entirely possible to put the entire workforce out of work just by following the logic of minimum wage proponents.

On average, unemployment for young people is 15% higher than it is for adults. Why are young people having difficulty finding jobs today? Because, due to the minimum wage and other regulations, it's too expensive for most companies to risk the time and money necessary to train an inexperienced high school or college graduate who will probably move on to something else within a year or two anyway. 

Instead, the business is forced to minimize the risk posed by a higher minimum wage by only hiring over-qualified, over-experienced workers for entry-level jobs that used to be worked by teenagers and college grads. This creates a vicious cycle of unemployment for young people that can't get the experience they need to begin their professional careers; this cycle is compounded in a weak economy. I'm sure every college graduate reading this can at least remember a time when they were staring at a posting on Indeed or Careerbuilder and muttering, "so I need experience before I can get experience?"

I'm still trying to figure it out myself.

Don't let its proponents fool you: they claim that the minimum wage protects the poor and the marginalized of society. The truth is the minimum wage will only create more unemployment and misery for the workers it's supposed to protect. Minimum wage laws, by their very nature, only outlaw jobs that pay less than a totally arbitrary dollar amount while doing nothing to create a more favorable environment for businesses to employ people.

So what's the solution? How about "freedom of contract?" Wouldn't it be a novel idea for people to negotiate their own pay, hours, benefits, etc., without involving government force? If someone wants to take a $5/hour job rather than sit around and do nothing, why shouldn't they be able to? Should a willing worker go jobless or be forced on welfare because his or her experience, education, or production may not merit the government-enforced minimum wage? In a free society, the price of one's labor is an issue that should be decided between the worker and his potential employer, not the government.

UPDATE: If you want to understand what really hurts low-income workers, look at the value of our money. In 1956, the minimum wage was $1.00/hr. However, our coins (dimes, quarters, half-dollars and dollars) were still made with silver back then. For an 8-hour work day, a minimum wage worker in 1956 would earn 32 silver quarters. How much is that worth today? About $120. How much would a 2013 worker make with a minimum wage of $10/hour? $80. Blame the Federal Reserve.

Related posts:

Recommended reading:

by Murray Rothbard

by Henry Hazlitt

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  1. Are you a simpleton? None of this analysis takes into account the massive power imbalance between workers, particularly those that would be on minimum wage, and bosses. If there were no minimum wage, employers would simply pay low skilled workers less and less, if the worker complained, well, thats just too bad, plenty of other people out there who will work for $5 an hour. Without a minimum wage that people can actually live off, living standards for the poor will go through the floor, even for those who are lucky enough to be earning peanuts. You surely don't actually think a company like Walmart would pay people more out of the goodness of their hearts, right?

    1. Clearly what you fail to see is the simple point that a minimum wage destroys jobs. Someone that once had an unskilled job, no longer does, because his artificially set price of labor does not warrant his services any longer...

    2. You lack only enough imagination to overcome the simplistic notions of the labour market you may have learned in school. E.g. potential workers could join a sort of professional association with skill standards for membership and a recommended wage for potential employees. This would set the framework for price negotiation, if the employer wants a worker with certified skills. Workers would generally be unlikely to work below a "living" wage, so employers would be unable to hire below a certain level. The professional organizations must remain competitive by, perhaps, offering training, etc.

    3. Alex, if your logic is correct then we would see all low skilled workers making the minimum wage. Instead an average employee at Walmart makes more than a dollar an hour more than the minimum wage. What's to stop Walmart from using all that power to drive down the wages of their employees even more? Why does Target pay my neighbor $10 an hour if they can so easily find someone to do the same job for minimum wage? It's because of the market. That price is where the equilibrium is. When companies compete for labor in the market place it drives wages up, and requires zero government interference to do so. Go study that supply and demand graph and maybe you'll learn something about economics today.

    4. Alex - You can only pay so little in a truly free market. If the business next door is offering .50 more than you, you lose your employees to them.

      Not only should businesses have to compete in terms of the price at which they sell their products or services, they should have to compete for labor as well.

      With an artificial wage floor in place, they really don't have to compete because it put so many people out of jobs that there is an incredible surplus of labor.

      When you have more laborers than you have jobs, the principles of supply and demand should drive the minimum wage down.

    5. Alex, you begin your post by asking a question. Many that have responded to you failed to see the point of that question and unfairly, in my opinion, attacked you. I think your opening question is pure genius! Afterall, what is the point of attempting to debate with someone until you verify that they are on equal footing with you?

    6. You can live off of minimum wage? How about get a skill?

    7. Alex,
      The imbalance you speak of between employer and employee is not all that obvious to me. Speaking as a boss I am in a position to know that employees wield a great deal of power over their employers. Employees represent a company, its products and its services. Employee satisfaction is a very important factor in staffing a business with hard working competent people. Part of finding and building a strong and dedicated group of employee’s means you have to take risks in hiring people with zero or very little experience and allowing them to prove their value. Alternatively you can recruit from a limited, dwindling and much more expensive pool of qualified and pre trained workers. In my industry entry level jobs paid very little and had low expectations, the good employees show their value and move up the ladder from there. Those days are all but gone due to increasing minimum wage laws and other staggering costs associated with hiring young people. Now it is simpler to try and recruit from related industries leaving pretty much anybody with no experience or under the age of 25 left SOL.

    8. You can tell a losing argument when it starts with a personal insult. Everything that follows is simply effluent backfill.

    9. "If there were no minimum wage, employers would simply pay low skilled workers less and less"

      Less and less, yes, until you reach the equilibrium price, that will vary from industry and profession. Anything above this level might be nice for those that manage to get a job, but all those "other people out there who will work for $5 an hour" will be unemployed.

      That's minimum wage in a nutshell, better conditions for a few at the expense of someone else's unemployment.

    10. walmart already pays above minimum wage

  2. If you are expecting liberals to have sound reasoning when it comes to economics... think again.

    Thanks for the post!


  3. I cannot beleive you wrote that: "Instead an average employee at Walmart makes more than a dollar an hour more than the minimum wage."

    You are truly out of touch. The more money a comapny makes, the more it socks away, it never repays the shop floor. This whole article is 'hooey'

    1. Absurd.. "The more money a comapny makes, the more it socks away"... They reinvest, they pay shareholders, and making money does not always mean making a profit...

      Are you a liberal? If so that explains your comments.

  4. This information isn't for liberals... If they identify themselves as liberals they are not capable to understanding ECON 101