Pressing Onward: May 17, 2014

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.

Saturday, May 17, 2014

The Consequences of Increasing the Minimum Wage