Minimum wage hurts those it is intended to help

A $15 per hour minimum wage will cause higher unemployment, higher inflation and a “something for nothing” attitude. Photo: Elaine Thompson / AP

WASHINGTON, November 17, 2013 — President Obama called for an increase in the federal minimum wage in his 2013 State of the Union Address. On Friday in a speech commemorating the Fair Labor Standards Act, Labor Secretary Thomas Perez called raising the minimum wage “job one for this administration.” Bills to do just that have been introduced in both chambers of Congress, and there are persistant demands to raise the minimum wage from the current $7.25 per hour to $9 or more.

The Washington D.C. city council believes the minimum for large retailers like Walmart should be $12.50 per hour. In California and New York City, workers in the fast food industry believe the minimum should be $15.00.


SEE RELATED: DC Council passes anti-Walmart “living wage”


Is raising the minimum wage a good idea?

At current levels, the annual income of a full-time minimum wage worker would be about $15,000. This is barely above the poverty level for an individual and far below the poverty level for a family of four. So don’t these people need more?

The reality is that the minimum wage hurts exactly the people it is supposed to help. Anytime a price — and wage is a price —  rises, buyers (employers) cut back purchases. Just because the government decides that milk should sell for $7 per gallon doesn’t mean that you have to buy any. Orange juice may not be very good on your cereal, but if it’s cheaper than milk, it will do to wash down an Oreo.

Set prices too high, and surpluses result. A surplus of labor is called unemployment.


SEE RELATED: Employer: Pay me, pay me fairly and increase my pay


Minimum wage hikes cause unemployment. Not for everyone, of course. There are plenty of workers who earn above minimum wage, and they will be in greater demand as employers jettison lower quality workers. But workers with no skills and no employment history will be the first to go. If you don’t like black or gay workers, a higher wage makes it easier for you to ignore them in favor of other workers. It’s no accident that minimum wage was one of the first laws passed by the South African government to enforce Apartheid

If there were no minimum wage, the market would set the wage at the point where the number of people seeking jobs would match the number of jobs available. Involuntary unemployment would be close to zero.

Suppose the minimum wage were $10.25 per hour. Some workers simply aren’t worth that. If an employer can’t make that money back, it’s not a job; it’s charity. It could be an investment, but not when workers come and go in search of higher wages. Raise the minimum wage, 

A fast food operation might have a trash filled parking lot which the owner estimates costs her business about $250 per week. If she could hire someone at $5 per hour ($200 per week) to clean the parking lot, that person would be hired. At $7.25 — $290 per week — the person would not be hired, and the job would cease to exist. A business doesn’t stay in business if it pays $290 to solve a $250 problem.

Unemployment figures support this reasoning. The overall unemployment rate is 7.3 percent, but the rate for teenagers is almost 25 percent. The rate for minority teenagers in some inner cities is close to 50 percent. The rate for women entering the work force for the first time is over 20 percent.

The minimum wage is hurting just the people it is supposed to help by causing very high unemployment rates among new workers, black youth, and the unskilled. It is a lie to say that the minimum wage is $7.25 per hour; it is zero, and it always has been.

Do workers need more than $7.25 per hour? The question is meaningless. If we care about workers, we should ask instead, how can we ensure that they have skills valuable enough to make them worth hiring at a wage they can live on? But that is a hard question. An easier set of questions would be, who benefits from a higher minimum wage? The least skilled? The least advantaged? Those with the least hope for a better life?

No, no, and no.

Marxists have a saying: From each according to his abilities, to each according to his needs. Our needs are all pretty similar, so if we judge by need, we should all be paid about the same. That might work in a stone-age village, but it is difficult to get someone to go to school for 20 years to be a neurosurgeon when the job pays as well as mowing lawns.

This system failed in Russia and China, and it is failing in Cuba and North Korea. Those countries are good at keeping people employed — eliminate farm machinery, and everyone in the United States would be employed, too — with a standard of living that is extremely low, but very poor at creating economic growth through innovation.

In the U.S., we generally compensate people according to their contribution. This works as long as people are able to improve their skills and really are compensated according to their contribution to production. This promotes economic growth and vast improvements in the standard of living.

Increasing the minimum wage hurts the people it is supposed to help by reducing the number of jobs available, reducing incentives to improve skills, and raising prices of products to consumers — including to consumers made unemployed by the minimum wage.

The best policy is to eliminate the minimum wage and let the market decide. Then workers would know exactly what the value of their output was worth, unemployment would fall, the economy would grow, and there would be little wage induced inflation. Everyone would benefit.


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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and an Associate professor at Richard Stockton College teaching Finance, Financial Institutions, Introduction to Financial Management, Game Theory, Graduate Managerial Economics, Graduate Financial Management. 

 

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