Posted By Brian on January 31, 2014
“One of the great mistakes is to judge policies by their intentions rather than their results.” -Milton Friedman
Obama’s proposal of raising the federal minimum wage to $10.10 seems like an idea that everyone can get behind. Everyone except those rich, white, capitalists, that is. Poor people should be paid more, and these employers are exploiting the low-skilled workers, right?
The exploitation argument has a few false assumptions. The biggest assumption is that the worker can only work for that particular employer. If I am making $7.25/hr and another employer is willing to pay me $8.00/hr, the rational decision for me to make would be to take the other job. In the real world, however, will I actually take the other job? Probably not. Here’s why. If the first employer finds out that another employer is willing to take me away from him, he will have to make the decision if I’m worth that $8.00 to him. If I am worth that, he may offer me the $8.00/hr – maybe more.
I am now in a really great position. I have worked at minimum wage for awhile and built up skills so that I am worth more. Now different employers are competing over me. I can now barter for higher wages, better benefits, better working conditions, etc… At some point in the bartering process, one of the employers will give up and the other employer has “won” my labor. I now make $8.50/hr. This is my maximum production value (what an employer is willing to compensate me for my labor) Awesome.
This is how pay raises work in the free market.
Now let’s look at how it works in a government-controlled market.
I am a worker making $7.25/hr. Another employer offers to pay me $8.00/hr. I begin the competing process and just as in the last scenario, the employers “bid” to hire me for what I’m worth – and just as in the last scenario – the cut off is at $8.50. I am happy that I get paid $8.50 and hour.
But wait… compassionate people don’t think that is enough. They think I should get paid more. These caring and compassionate people have the best intentions, so they celebrate getting a law passed that makes the minimum wage $10.10 (the current proposed federal minimum wage). Hooray! Poor people will make more money now!
Unfortunately, no. We already covered that my current production value is $8.50/hr. That is the MAXIMUM that an employer will hire me. If they are forced to pay me $10.10 in order to hire me, they simply won’t hire me. No sane employer will employ somebody in order to lose money. That is a quick way to go out of business.
Now, instead of making $8.50 and remaining employed to further my skill-building and experience level, eventually receiving even another pay raise, I am out of a job. My number-eating alligator education taught me that $8.50 > $0.00.
Who Does It Help?
The minimum wage law has some positives. It helps 2 groups of people. The first group is a minority group of workers. These employees are the ones that legitimately were not being paid what they are worth. The employee that is paid $8.50/hr and is worth $10.50/hr now gets paid $10.10. Yay! These are the few people that the government will parade around during political speeches.
The second group that the minimum wage law helps is big business. “What?” you ask? “But big businesses are the ones exploiting these workers by paying them a low wage. The raising of the minimum wage will force them to pay their workers a fair wage.
Yeah, you would think. Why exactly is WalMart and Costco advocating and lobbying for a higher minimum wage? If they thought it would be better to pay higher wages, they would. I don’t believe there’s a law saying they can’t pay them more. Big businesses can afford to pay their workers more, but small businesses can’t. The minimum wage law effectively shuts down their small, mom-and-pop type competitors. This is another example of crony capitalism.
The Law of Demand
The simplest way for me to understand and explain the negative effects of the minimum wage is to repeat the elementary economic principle of the law of demand. This law says that as a price of a product increases, consumers will buy less of it. Conversely, as a price of a product decreases, consumers will buy more of it.
In order to make money, you must barter for something you have. If you have no product to trade, then you must use your labor. Labor has become your product. You trade your labor. Going back to the law of demand: if the price of labor is raised artificially, consumers (employers in this case) will buy less labor.
Don’t believe the unemployment statistics
The unemployment rate is not the 6.7% that they claim. These are adjusted numbers to influence the public into having a false faith in the economy. In 1994, the Bureau of Labor and Statistics (BLS) created a new category for certain unemployed people. This category was “discouraged worker.” According to their unemployment statistics, this category doesn’t get counted. This is a simple way for them to fudge the numbers and create artificially low percentages. If the BLS wants to drop the unemployment rate, they can simply add more unemployed into the “discouraged worker” category.
Simple math to help explain and drive this point further: If there were 100 people in the world and 10 of them were unemployed, we would say there’s a 10% unemployment rate.
(10/100 = 10%)
But I’m up for reelection soon and 10% doesn’t look very good, I need to drop that number, so I’m going to say that 3 of them have been out of work for too long and they are now “discouraged,” so we’ll take them out of the equation altogether. We now have only 7 people on unemployment out of 97.
(7/97 = 7.2%)
Wow! I’m such a great politician. Under my leadership, I have dropped the unemployment rate from 2.8%. Vote for me again, and I promise I will mess with the numbers again to make myself look even better.
What’s really happening is that unemployment keeps getting worse and worse, with so few jobs available (partly thanks to the minimum wage laws) that more people are being labeled as a “discouraged worker.” The BLS has another statistic called the “U-6″ which in short is all unemployed, underemployed, and discouraged workers combined. This unemployment number ranged between 13-16% last year. Economist John Williams of Shadow Government Statistics claims that the real unemployment rate is right around 22%.
Here’s a graph that shows all 3:
All that to say, don’t believe anything about stats that are given about unemployment rates.
Minimum Wage Myth #1 – It helps the poor.
I’ve already tried to argue against this, but I needed to put this as #1 because it is such a prevalent argument. I am 100% on board for helping the poor, but unfortunately the most needy are the ones most hurt by minimum wage laws.
Minimum Wage Myth #2 – Workers deserve a fair wage.
This isn’t a myth, really. Workers deserve a fair wage. In a free market economy, they will get a fair wage. Of course you have to define what fair means. Minimum wage supports use the word “fair” to mean “as much as everyone else.” Free market supporters use the word “fair” to mean “equal to the value you produce.” This is different for everybody. A fry cook at McDonald’s doesn’t deserve $15/hr because that is not fair. It does not equal the value he is producing for McDonald’s.
Minimum Wage Myth #3 – It helps boost the economy.
Anything can be done legislatively if you tag several choices of words at the end of a bill. Two of the biggest culprits are probably “for the children” and “to boost the economy.” The claim here is that if employers pay their employees more, then they will have more money to spend in the economy. First, this overlooks the fact that employers will be forced to compensate the extra cost of labor. They have a few options to choose from:
1. Hire less people
This goes back to the law of demand. If they have to pay more for labor, they will be forced to buy less labor. Now you’ve removed someone from earning any money at all. How does that help boost the economy?
2. Increase prices of goods
If employers are forced to pay more money for labor, they will be forced to earn more money by charging more. Of course taking supply and demand into the equation, the possibility of increasing prices may just drive a small business into the ground.
If an employer needs cheap labor and can’t get it where he’s at, he’ll find a place to get it. Someone will underbid the minimum wage worker. Unfortunately, it’s against the law for an American to compete for that job (if we’re strictly speaking about the federal minimum wage).
4. Invest in technology
No one will argue against technological advancements, but they do often take away low-skilled jobs. Have you been in a Jack-in-the-Box lately? Many of them have computer screens rather than employees taking your order. Employers don’t have to pay a machine an hourly rate, so once it is cheaper to automate a job through technology, jobs are lost.
I’m going to steal this straight from a Thomas Sowell article, “Minimum Wage Madness” because it’s too good not to copy.
“Most nations today have minimum wage laws, but they have not always had them. Unemployment rates have been very much lower in places and times when there were no minimum wage laws.
Switzerland is one of the few modern nations without a minimum wage law. In 2003, “The Economist” magazine reported: “Switzerland’s unemployment neared a five-year high of 3.9 percent in February.” In February of this year, Switzerland’s unemployment rate was 3.1 percent. A recent issue of “The Economist” showed Switzerland’s unemployment rate as 2.1 percent.
Most Americans today have never seen unemployment rates that low. However, there was a time when there was no federal minimum wage law in the United States. The last time was during the Coolidge administration, when the annual unemployment rate got as low as 1.8 percent. When Hong Kong was a British colony, it had no minimum wage law. In 1991 its unemployment rate was under 2 percent.”
The minimum wage sounds good on the surface, but it’s true effects on unemployment and a rotten economy are seen easily today. More steps must be done to have a free market than simply removing minimum wage laws, but it is a good first step. Let’s end the ban on working.