The war on wages

In President Obama’s recent State of the Union address he proposed lifting minimum wage from $7.25 to $10.10. Like Obama, many Americans believe raising the minimum wage sounds like a reasonable and moral prospect. In theory, the extra buck for low wage workers makes their lives easier by giving them more to spend and could subsequently improve the economy due to increased consumer spending. But does raising the minimum wage actually improve the quality of life for low wage workers and our country’s economy? Contrary to popular belief, minimum wage can be extremely detrimental to the economy. Wage hikes increase the unemployment of young workers, the discrimination of minorities, and the failure of businesses.

Jobs are determined by the labor market, which, just like all markets, is affected by the laws of sup- ply and demand. Workers supply the labor and business owners demand the labor to help them run their  businesses.  Minimum  wage  creates  a  price  floor  in  the  market,  and,  due  to  the  simple  laws  of  supply and demand, there will be a higher quantity of workers willing to supply labor than businesses willing to hire these workers at the given minimum wage price. Put more simply, there is a surplus of labor.

Increasing the minimum wage does not make a worker’s productivity worth more. Businesses will not want to hire the worker, whose productivity is worth less than the minimum wage, and that worker will most likely become unemployed. Thus, as minimum wage increases, unemployment does as well.

In the past 20 years, two modern industrialized nations have resisted implementing a minimum wage: Switzerland and Hong Kong. In 2003, The Economist analyzed the labor situation in Switzerland, claiming,  “Switzerland’s  unemployment  neared  a  five-year  high  of  3.9  percent  in  February.”  For  Hong  Kong, in 1991, when it was still a British colony, the unemployment rate was below 2 percent. When it  came  under  Chinese  control  in  1997,  the  government  imposed  many  new  benefits  to  its  workers,  including  imposing  an  artificial  wage  limit,  which  resulted  in  an  unemployment  jump  to  7.3  percent  in  2002. As a basis for comparison, the U.S unemployment rate was 6.8 percent in 1991 and 6 percent in 2003.

Young workers are one of the groups hit the hardest by increases in the minimum wage. Knowl- edge and skills are developed from experience, and levels of pay are directly associated with knowledge and skills. For this reason, only two percent of American workers over the age of 24 earn the mini- mum  wage.  The  surplus  of  labor  created  by  a  price  floor  allows  employers  to  select  from  applicants  whose productivity is less than or at the minimum wage. The employer will then choose the applicant with the most skills and experience, cutting young and willing workers out of the market and out of a job. This phenomenon wastes labor and makes youth idle, prohibiting them from gaining skills and experience that they would gain with a job, which would increase their productivity and income in the long run. In a case study from 2004-2006, researchers found that when New York City increased its minimum wage from $5.15 to $6.75, there was a 20.2 percent to 21.8 percent reduction in the em- ployment of younger, less educated individuals. Implementing a minimum wage ensures that people whose skills do not justify pay at the minimum wage will be unemployed. It is no accident that the teenage unemployment rate is twice the magnitude of the overall unemployment rate. This was not the case before the large increases in the federal minimum wage, where a larger percentage of teenagers were employed than adults.

Critics  argue  that  increases  in  unemployment  are  fine,  because  the  income  benefits  to  low-income workers who keep their jobs are more valuable than the wages lost from the low-wage workers who lose  their  jobs  providing  a  net  benefit  to  low-income  individuals.  This  is  a  plausible  argument  in  the  short  run.  However,  in  the  long  run,  the  net  benefit  will  be  eroded  because  of  the  experience  and  knowledge lost by low skill young people who could be gaining skills and experience.

Discrimination of minorities is an ironic and unfortunate effect of the minimum wage. Discrimi- nation is made possible because the surplus of labor created by the minimum wage gives employers more selection of applicants and more leeway to hire their desired ethnic group. In a free market, pass- ing  up  qualified  minority  workers,  who  are  more  skilled  and  willing  to  take  less  pay  is  extremely  costly  for a business, making discrimination much less frequent.

The  employment  of  blacks  in  the  20th  century  is  a  perfect  example  illustrating  how  a  price  floor  increases discrimination. In 1930s and 40s black unemployment was less than white unemployment. However, following the Fair Labor Standards act which increased the federal minimum wage 150 per- cent in an eleven year period from 1945 to 1956 the change in black unemployment was extreme.

Since 1954, black unemployment rates have been double those of whites, and, to this day, rates are at  the  same  inflated  levels.  In  fact,  the  group  most  negatively  affected  by  the  minimum  wage  has  been  black teenage males. In 1948, when black teenage male employment exceeded white teenage male employment as a basis for comparison, teenage black unemployment in 1948 was one half the teenage black unemployment in every year of the 1960s and less than one-third of what it was in the 1970s. The typical explanations for black teenage unemployment, such as inexperience, inferior education, lack of skills, and racism were all more prominent factors before the wage laws were implemented discrediting these points.

Another factor of the minimum wage is the length of unemployment. Germany, a country with no  official  minimum  wage  laws  but  with  federal  mandates  on  businesses,  job  security  laws,  and  strong  labor unions, has driven up the labor costs at rates much higher than the United States. Germany’s du- ration of unemployment lasts 12 months or longer for more than half of unemployed people. Only 10 percent of the unemployed in the United States are unemployed for that long. Also, the labor force participation rate, a measure used to observe how many people above the age of 15 have a job or is actively looking for one, is higher in the U.S than in Germany. Therefore the previous statistic is not due to Americans giving up because of the lack of jobs. It is due to them being hired.

Employee  benefits  and  the  real  value  of  their  paycheck  decrease  when  the  minimum  wage  is  raised.  Logically, an employer’s response to an increase in expenses is to raise prices or to cut employee ben- efits  to  stay  profitable.  In  many  sectors  of  the  economy  increases  in  prices  drive  away  people  en  masse,  forcing  business  to  cut  down  on  employee  benefits  instead.  And  when  businesses  are  forced  to  raise  their prices or go out of business, an extra burden is placed on many low-wage workers, because their food and clothing costs will take up a larger percent of their paycheck. Therefore, the real value of their  paycheck  is  worth  less  because  of  the  inflation  minimum  wage  causes. 

Raising minimum wage sounds moral and practical in theory, but when one looks at the true effects of this policy, it is clear how ironically terrible it is for low-wage workers. As Milton Freidman, the renowned 20th Century economist, asserted, “The fact is the programs that are labeled as being for the poor, for the needy almost always have effects exactly the opposite of those their well intentioned sponsors intend them to have.” The minimum wage rate increases poverty and unemployment for young  people  and  minorities.  We  must  stop  assuring  that  people  whose  skills  are  not  sufficient  to  justify a wage at the minimum wage rate are cut out of the market. We must eradicate the minimum wage. Freidman also once said, “we must not judge a bottle solely by its label, you have to look inside to see what the law or measure produces.” It is our duty as citizens that before we determine and advertise our opinions that we know the actual implications of the policy we are advocating for because looks can be deceiving.

#opinion