I have
written previously about the minimum wage and the effect this
price-control has on the unemployment rate. Many economists are in agreement
that raising the minimum wage has negative effects on employment, particularly
among workers who are unskilled or inexperienced. By raising the wage above a
given amount, the government makes it harder for those workers whose labour is
worth less than that amount to find employment. That is why most victims of
minimum wage legislation are typically the poorest and the youngest. However,
this belief is not unanimous among economists, and I came across this article the other day by Jared Bernstein that argues in favour of raising the minimum
wage. Some common misconceptions are espoused in the article and I will try to
explain why they are incorrect.
Bernstein
writes that minimum wage laws are integral to the functioning of the economy,
much like laws against child labour, discrimination, wage theft, and overtime
without extra pay. While I agree that discrimination and wage theft are
generally bad for the economy and I support legislation that attempts to
eliminate them, the absence of minimum wages laws in many developed countries
suggests that we could easily survive without them. Despite having no minimum
wages laws, Switzerland has a prosperous economy and a very low unemployment
rate. While Hong-Kong was still a British territory, it had no minimum wages
laws and its unemployment rate was only 2 percent.[1]
However, in 1997, while under Chinese rule, employers in Hong Kong were forced
to hire more workers and pay increased wages and benefits. This law had the
predictable effect of raising the unemployment rate. In 2002, it was 7.3
percent, nearly triple would it was under British rule. In 2003, unemployment
in Hong Kong hit an all-time high of 8.3 percent.[2]
This example illustrates that legislation that attempts to artificially raise
the wage rate has the effect of increasing supply and decreasing demand beyond
the equilibrium level. When there is excess supply of a good, we call it a
surplus. When there is excess supply of labour, it is called unemployment. The
real minimum wage is always zero dollars, since you have to be employed in
order to receive it. Unlike laws that mitigate workplace discrimination or wage
theft, the minimum wage is an artificial price control that does not make
workers better off than without it. Bernstein is being misleading when he
claims that such wage laws are integral to the functioning of the economy.
Bernstein
paints a rosy picture of how minimum wage laws came into existence. He quotes
FDR and Frances Perkins, both proponents of minimum wage on the basis that it
would establish an equal plane of competition and would prevent market
failures. The first minimum wage in the United States was set at 0.25$ per hour
in 1938 with the passing of the Fair Labour Standards Act. A previous attempt to
establish a minimum wage in 1933 was declared unconstitutional (and rightfully
so). However, wage controls were proposed earlier than that, namely in Canada
and South Africa as early as 1920. The goal of these policies however, was not
to raise the living standard of workers. People supported these laws with the
explicit intention of keeping undesirables like blacks and Asians out of the
workplace. [3]As
I have already stated, the biggest victims of minimum wage legislation are
typically low-skilled workers or those without previous job experience. Since
most blacks and Asian immigrants to Canada in the 1920s fit those criteria, the
racists of the time knew that enforcing a minimum wage would make such people
unemployable. It is fortunate that these laws never came into existence, but
the fact that they were advocated for this reason shows that even before they
existed, people were aware of the inverse relation between minimum wages and
employment.
Many social
liberals like Bernstein advocate a high minimum wage so that those who receive it
may live comfortably or even support a family. While you should seriously refrain
from starting a family if you make 7.25$ an hour, the majority of those earning
the minimum wage are young single people who still receive financial support
from their parents. According to the Wall Street Journal, 42 percent of minimum
wage earners still live with mommy and daddy. Only 15 percent are actually
financially independent.[4]
The condition of the working poor is a transient one. Most people do not work
minimum wage jobs their entire lives; they work at McDonalds for a few years in
high school, and as they gain experience, qualify for higher-paying jobs. This
is corroborated by evidence. According to the US Treasury Department, the
incomes of those individuals in the bottom 20 percent rose 91 percent from 1996
to 2005, while the incomes of those in the top 20 percent rose by only 10
percent in those same years.[5]
This shows us that the wages earned by individuals fluctuates over time.
Someone who is in the bottom 10 percent of wage-earners may be in the top 10
percent sometime in the future. This is why minimum wage legislation is so
harmful—because it robs young people of the opportunities to gain work
experience and qualify themselves for higher wages in the future. The poor are
similarly affected. Therefore, when people advocate a “living wage” so that the
poor can live more comfortably, they really are incurring misfortune upon the
very people they claim to help.
Contrary to
what Bernstein claims, market failures have never been caused by the absence of
minimum wage laws. As I have shown, they are responsible for more failures than
they attempt to mitigate. In an economy without a minimum wage, workers would
not be paid in pennies (as Bernstein writes). Any business that paid their
employees like that would not be in business for very long, as nobody sane
would want to work for them. An excess supply of workers in relation to demand is
only caused when there is interference in the economy. Workers must be allowed
to earn whatever wage is determined in the market and employers should be
legally permitted to pay it to them.
Other Related Posts:
[1] http://www.creators.com/opinion/thomas-sowell/minimum-wage-madness.html
[2]
Philip Segal, “Hong Kong Solutions,” Far Eastern Economic Review, March 20,
2003, p. 13
[3]
Charles H. Young and Helen R. Y. Reid, The
Japanese Canadians (Toronto: The University of Toronto Press, 1938), pp.
49-50
[4] http://online.wsj.com/news/articles/SB121694456522983005
[5]
“Movin’ On Up”, Wall Street Journal, November 13, 2007, p. A24
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