Minimum Wage Insanity

For some reason, the minimum wage is an issue that just won’t die.

Stay Informed
Never miss a blog post again
I get it. If you only look at the “obvious” effects of a policy like the minimum wage, it seems like a brilliant idea. If everybody who was making less than $X/hour suddenly were making $X/hour, think about how much better the economy would be! No more greedy capitalists taking advantage of the poor, downtrodden proletarians!

And when studies try to parse out the effects of a minimum wage or the media reports on it, we can easily see the people who have benefited from it, at least in the short term. If you used to make $7.25/hour and suddenly you make $10.10/hour, there are obvious benefits. But the people who are hurt by these laws (usually) don’t even know it. How can you possibly isolate and measure the people who don’t get hired during the many years after the imposition of a higher minimum wage? Oh, and good luck trying to measure the social consequences of this unemployment.

I truly believe that most people who advocate for a minimum wage mean well. There are exceptions of course, such as the unions, politicians, and racists. But they are truly the exception. When I meet a random college student who thinks it is a great idea to have a $10, $12, $15, or even (gasp!) $25 minimum wage, I feel confident that it is because they are an empathetic person, not because they want to decimate the lives of the poor.

It is most unfortunate that the great majority of empathetic, caring, and good people do not understand economics and are unfamiliar with history. It is with these people in mind that I write this post, and I hope I can do my part to steer people towards economic and ethical sanity: a minimum wage of zero.

 

A Brief Introduction To The Minimum Wage

The minimum wage stipulates that it is a crime for an employee and an employer to do business together for less than a specified amount of money.

Note that it does not mandate that employees get hired, but only that they don’t get hired. In other words, the minimum wage is an unemployment law, not an employment law.

Putting economics aside for a moment, the only thing that the minimum wage does is violate the rights of consenting adults to engage in a mutually beneficial economic transaction. Thus, it falls into the same category as drug laws, prostitution laws, jaywalking laws, and so on. It’s kind of ironic that the people who tend to be most in favor of repealing these aforementioned victimless “crimes” are the ones who most support drastic increases in the minimum wage. But I digress.

Proponents of the minimum wage like to think of it as a kind of “rising floor”, lifting all those who stand on it to ever higher levels of income. Of course, if this were true, there would be no reason whatsoever why we should not institute a $1000/hour minimum wage. Hell, why would we even bother being so cheap when it could be $2000 or $10,000? Clearly, people intuitively recognize that there is some sort of tradeoff involved.

A more apt analogy than the rising floor would be a hurdle that people need to jump over. If you can’t produce $X/hour’s worth of value for an employer, they simply will not hire you. Increasing the minimum wage just puts that hurdle a few inches higher, making it that much more difficult to get a job.

In other words, the minimum wage hurts the very people that it sets out to help. It is, by definition, the most disadvantaged people who are capable of producing the least value. What business owner in their right mind would hire a severely disabled person who will likely require more training and supervision over a person who already has a good track record? It is precisely through lower wages that the disadvantaged are able to compete.

 

Demographics of Minimum Wage Workers

Statistics can be incredibly misleading. I don’t trust them, and neither should you. With that in mind, I would highly suggest you do your own background research, do some fact checking on me here, and interpret the following data with a grain of salt.

Using these statistics to get quantitatively useful information seems dubious to me. There is so much room for error or manipulation. Instead, I want to use this data to find qualitatively interesting information such as trends and the absolute significance of the problem. In other words, who is “the minimum wage problem” affecting, and is it even that big of a problem to begin with?

According to a 2012 report from the Bureau of Labor Statistics, 55% of the total minimum wage workers are younger than 25. Of those within this age group (16-24), 12.1% work at or below minimum wage. For those aged 16-19, that number is 21.1%. A mere 2.9% of workers age 25 and over are at or below the minimum wage.

What does this data mean? Clearly, the young (and therefore inexperienced) are disproportionately working for lower wages. This makes sense. Teenagers, in general, don’t have particularly valuable skills. With less than 3% of workers older than 25 being at the minimum wage, there aren’t too many “breadwinners” who would be directly affected by changing it.

In fact, according to this 2010 study, 63% of those earning less than $9.50/hour are the second or third income in households earning at least double the poverty line, and 43% live in households making at least $50k/year. Only 11.3% of workers who might gain from an increase in the minimum wage to $9.50 are even in poor households.

This hardly sounds like the epidemic of working poor plaguing America’s cities that the media is trying so hard to present. Without even considering economic theory, it seems reasonable to conclude from the demographics that an increase in the minimum wage would have a negligible effect on poverty.

 

Common Arguments For The Minimum Wage

Again, I want to emphasize that the vast majority of laymen who advocate for increases in the minimum wage mean well. They are just economically illiterate, which is completely understandable, considering how they get their information from the economically illiterate media and overtly dishonest politicians.

In the course of numerous conversations and reading many articles in favor of minimum wage increases, there are several arguments that I see come up quite often. They are all dubious. I will now go through them one by one.

“People are worth more money than that!”

There is a difference between being “worth less” than someone else and being paid less. If you ask why someone “should” get paid a certain amount when other people get paid so much more, you are attaching a moral judgment to an inherently amoral issue. It’s like asking why it “should” be so cold in Wisconsin right now when it’s nice and warm in Miami or San Diego.

There are forces at work based on gazillions of separate decisions made by billions of different people which determine the price of all products and services, including the price of labor. This has nothing to do with the inherent value or worth of these products. Rather, it has to do with the value someone else would derive from using it.

The “price” of a person’s labor has absolutely nothing whatsoever to do with the “value” or “worth” of that person in general. It has to do with the relative value that the employer of that labor gains from the relationship. If an employer believes he will gain by hiring an employee at a certain rate, he will do so. And, of course, this goes both ways. Someone who trades their labor for a certain amount of money is not admitting to being “worth” only that much. They are just defining an amount of money that their time and effort is worth to them.

Why do some people accept less money than others? Because that is what they would prefer given the available alternatives, which have been determined by the gazillions of morally irrelevant decisions made by them and everyone else.

Setting a higher minimum wage is completely irrelevant to “improving the dignity of these workers”, as the pandering politicians allege. On the contrary, those in favor of a given minimum wage are saying that their opinions and personal values are more important than those who would voluntarily choose to trade their efforts for less than an arbitrary amount of money.

This is preposterous, and in insult to the dignity of these low-income workers.

“Big Business is exploiting minimum wage workers!”

In a voluntary transaction between any two consenting adults, there is no exploitation. So long as I am free to walk away from any potential agreement (as in, there is no coercion involved) and the terms have been stated clearly and honestly, it is silly to claim that I have been exploited, no matter the terms of the agreement.

There are infinitely many reasons I could be willing to work for any given amount of money, even small amounts (or pro bono). A few examples may help reveal the absurdity of this “exploitation” argument.

People volunteer. There are huge numbers of people who literally go out of their way (sometimes paying thousands of dollars) to find opportunities to do volunteer work with no motivation of financial benefit. In these cases, the desire to do good is a stronger motivation than money. For some people, volunteering is a way to strengthen their ego and make them feel like they are a good person. For others, they might volunteer in order to impress other people. I am in no position to judge or determine the motivations that encourage these people to make the voluntary decisions that they do.

People go to school. They’re even willing to sell themselves into effective debt slavery in order to obtain whatever benefits they think they’ll receive from going to university. Think about this. There are people who are willing to trade four years of their life and take out $150k in loans to major in classics! This is, from a financial standpoint, an incredibly stupid move. What could possibly possess someone to make a decision like this? Clearly, there are more than just financial considerations when people choose to voluntarily associate with each other. Perhaps this person really enjoys reading and learning about the classics. Perhaps they just feel that society has pressured them to go to university. Perhaps they want to make friends and get hammered for four years. These are all valid reasons, because they are being made by the person who has the right to make them. Who are you or I to make this decision for them?

Finally, what about unpaid internships? These poor fools are providing their labor for zero monetary benefit, and likely without charitable purposes in mind either. Is this not slavery? Is this not massive human exploitation? Of course not! People will gladly take unpaid internships because they serve the clear function of getting them valuable experience and potentially future, paid employment opportunities.

All this is not to say that, ceteris paribus, people would not prefer to get paid more than they are currently. Of course they would. Just about everybody would. But that is irrelevant. So long as there is scarcity in the world, there will be opportunity costs. These tradeoffs are the price we pay for not living in a utopia. I’d love it if I got paid $1000 per word for my writing. As it stands, I make a whopping zero, minus costs for domain and hosting. But I’ve been doing it for years, and this is hardly exploitation.

“The minimum wage isn’t a living wage!”

But what is a “living” wage? I’m sure my definition of a living wage is different from yours, which is very different from that of a poor farmer in Bolivia, and different from that of George Soros.

If the end that we have in mind is to raise the minimum wage such that it is equivalent or higher than some “living wage”, how can we determine when we have succeeded?

A poor person today making the minimum wage has luxuries that were a struggle for middle class people to have access to just fifty years ago. Up until the Industrial Revolution, the vast majority of people lived in abject poverty. Three hundred years from now (unless our politicians have destroyed us all with nuclear war or socialist economic policies), poor people will “only” have their own private jets, and the middle class will be taking regular vacations to the moon.

Our standards are constantly fluctuating, both personally and collectively. What many would consider a living wage now will surely be outdated in twenty years. What I considered a living wage as a college student is very different from what I consider it as a yuppy.

Claiming that the minimum wage needs to match up with some mythical “living wage” is pandering, pure and simple. It is completely meaningless in the real world.

Besides, very few people are actually trying to make a “living” on the minimum wage, so this is practically a non-issue. If you look at the demographics section above, you’d see that there are not many people who would be lifted out of “poverty wages” to “living wages”, even if the minimum wage made economic sense (which it doesn’t). It’s also worth noting that many of the individuals included in the “minimum wage or below” category are actually making quite a bit more money in tips or commissions, so the relevant numbers are even lower.

“The minimum wage should keep pace with labor productivity!”

Ahh, here’s a good one! Those who lean toward the free-market side will often say that wages are a function of productivity. Your income is equal to the value that you produce, so those with low productivity have low incomes.

Minimum wage supporters will now say “A-ha! In the past 30 years, labor productivity has risen [some large] XYZ%, but the minimum wage has remained the same! Capital is exploiting labor!” Usually this argument leads to a call for a minimum wage that is linked to the increase in average productivity of labor, which at this time would be a little over $20/hour.

Average labor productivity has certainly increased substantially over the past 30 years. It’s also utterly irrelevant. If average labor productivity has increased by a million percent, but mine has been stagnant, my wages will remain stagnant as well. There is no injustice in this.

It would be impossible for data to measure with enough precision whether this economic law is “working”. But I will, for the more empirical among us, do a kind of approximation.

As a substitute for individual productivity, which would be impossible to measure in most cases, we should look at a specific industry. Since, according to the BLS data cited above, 43.8% of minimum wage workers are in the food service industry, they make a decent proxy for minimum wage workers in general.

Between 1987-2012, the productivity of labor in food service industries increased at an anemic 0.6% per year according to the BLS. This amounts to a total productivity increase of just over 16% during that 25-year period. During this same period, labor compensation for food service employees increased at a rate of 5.1% per year, or 347% during the same period! If anything, this shows that many of these people are probably overpaid.

“Costco pays its new employees $11.50/hour, so why can’t everyone else?”

This one I don’t really understand. Are they saying that because Costco employees are similarly low-skilled but paid this much, all other low-skilled workers should be paid the same amount?

Supporters of a higher minimum wage claim that if Costco can afford to pay its employees this much and still make a “healthy” profit (a false and dangerous concept, which I plan to write about in another post), other businesses will have a similar experience.

But every business is different. They have different types of customers, different business models, and different employment strategies. What works for Costco will not necessarily work for Walmart.

There are definite advantages to paying your employees more. For example, Costco probably has a smaller employee turnover than other retailers, which saves money on training and on human resources/recruiting. These workers may be more satisfied with their jobs, and therefore be more productive. More than likely, their higher wages allows them to hire the best of these low-skilled workers.

Of course, these benefits depend on paying a relatively higher wage than competitors, not on the absolute wage they pay. An employee of Costco is less likely to quit because he will be paid less if he does.

If higher wages were generally warranted throughout the economy, or throughout a specific sector in the economy, other companies would be paying higher wages. If business owners are “selfish”, then won’t they act in whatever way maximizes their profits? If so, then it’s in Costco’s best interest to pay a higher wage, but it’s not in everyone’s best interest.

Free, unfettered markets set prices such that resources, including labor, are used as efficiently as possible. Profit is the reward for the entrepreneur to find these efficiencies. Lower prices and more access to goods and services is the reward that consumers get. Costco has found a way to be more efficient by paying workers more and employing fewer of them. Walmart has found a way to be more efficient by employing huge numbers of workers and paying them less.

“A higher minimum wage will stimulate the economy!”

I blame the mainstream economics profession for this one. Those who follow The Unquestioned Lord And Master of Economic Knowledge, also known as John Maynard Keynes, love to push this idea.

Here’s how it goes. By raising the minimum wage, low-income workers will end up with more money at the expense of the higher-income business owners, who lose out on profits. Because low-income individuals spend a higher portion of their income than the wealthy, there will be a higher aggregate demand injected into the economy. Since the less wealthy will be buying more stuff, the people whom they buy stuff from will then have more money to spend on other peoples’ stuff, and prosperity will be increased in ever widening circles.

A thorough refutation of Keynes would take more than a few hundred words. Wait a minute, no it won’t.

All consumption in an economy is preceded by production. If you want to buy a new video game, that game must have been created already and be available on store shelves or the internet. This much is trivial, but the implication is that the economy is not static; time is an important factor in its structure. Output in an economy does not immediately rise and fall with spending, as the Keynesians would have you believe.

There are capital goods, which are essentially investments in future productive capacity. It is the accumulation of capital over time that makes us more prosperous. This is as true in your personal life as it is for the economy as a whole; if you want to become wealthier, you save more of your money rather than spending it. More to the point, you choose to forego present consumption in favor of a larger amount of future consumption.

In other words, more spending isn’t intrinsically good for the economy. I’ll allow economist Robert Murphy to explain further:

“For example, imagine that thousands of couples in a large city one day decide to skip their weekly restaurant outings in order to save up for a summer cruise. At first, it seems that this would hurt the economy. After all, local restaurants see their sales drop, and so they buy fewer items from their suppliers and lay off some workers. The suppliers and workers in turn have less income to spend, and so sales are hurt elsewhere too.

However, so long as the entrepreneurs involved in the cruise industry anticipate the eventual increase in demand for their services, they will exactly offset the above effects when they hire more workers and other items in preparation for the busy summer months. The new savings (which were previously spent on restaurants) drives down interest rates, perhaps allowing the cruise operators to borrow money and pay for an additional liner. Thus the decision to save more doesn’t reduce total income or employment, once everyone adjusts to the new spending patterns. It is really no different from a scenario where thousands of people become health conscious and decide to spend their money on vegetables rather than fast food.”

Now of course, the minimum wage isn’t just about spending versus saving; it’s about income distribution as well. Those who support the minimum wage believe that it would take profits away from the wealthy and help the lives of those who are worse off.

For those individuals whose incomes do increase with the minimum wage (we’ll ignore negative employment effects until later), I won’t deny that they will be better off in the short term. Of course, if you are making $7.25/hour now but start making $10.10/hour tomorrow, you have certainly gained financially.

But again, this ignores the time structure of production. It’s not as though that extra money came from inflation (that will be the subject of another post), but rather it came out of the profits of the firms that were employing these individuals. The popular conception is that these profits merely benefit the rich and do nothing for anyone else.

That ignores the fact that ultimately, most of these profits get invested (yes, even the profits that go into ridiculously high CEO bonuses). These investments fuel the capital accumulation that makes us all wealthier, especially those at the bottom of the totem pole. For example, the profits may be spent on the building of a new factory, thus leading to an increase in the number of people that can be hired, and an increased supply of their product, which will help keep prices lower for consumers, making them wealthier too.

Okay, that’s enough Keynes-bashing for now. Raising the minimum wage will NOT help the economy. It will help a very tiny fraction of the economy for a short period of time, but then will make everyone worse off in the long term.

 

The Minimum Wage And Unemployment

Somehow I’ve managed to get through 4000 words without beginning to discuss unemployment. From an economic (rather than moral) perspective, this is the meat of the debate about the minimum wage.

Until the 1990s, the relationship between the minimum wage and unemployment was one of the few areas where nearly all economists were in agreement: raise the minimum wage, and you increase unemployment. That’s because the minimum wage is a price floor. When you have a price floor, it leads to an excess in quantity supplied of that good (labor).

Price floor graph

Then, in 1993, David Card and Alan Krueger did a groundbreaking study, comparing fast food workers in New Jersey and Pennsylvania after New Jersey raised its minimum wage. They found no indication that the increase in the minimum wage had a negative effect on employment.

Since that study, many more have come out (see here and here, if interested) with similar results. Those of us who “refuse to look at the evidence” are considered old fashioned and stubborn.

The reality is that there are many quantitative studies supporting both sides of this debate. More importantly, these studies are completely irrelevant.

This is not the place for a full blown discussion of epistemology in economic science. That being said, here are a few related facts (that all pretty much say the same thing):

  1. Statistics can be used in debate to prove just about anything (Or, as Homer Simpson said, “Facts can be used to prove anything that’s even remotely true”). Using the same data set, I could fairly easily phrase an argument in favor of two mutually exclusive ideas.
  2. The economy is an incredibly difficult system to model, because the complexities of psychology and human action cannot be simplified without losing key elements of them. There are far too many factors involved, and it would be presumptuous to think otherwise.
  3. Economic studies are very interesting from a historical standpoint, but the information cannot be generalized. If a study that used flawless methodology found that a minimum wage hike had no adverse employment effects, its conclusion would hold only under the exact conditions of the study.
  4. As any empirical scientist will tell you, a valid experiment involves manipulating a single variable at a time, and measuring the effects of the change of that one variable. If more than one factor were manipulated (intentionally or otherwise), there would be no way to know what caused the system under investigation to behave the way it did. In economics, it is impossible to isolate a single variable for study.

We could go back and forth all day throwing peer-reviewed papers at each other, but it would all be pointless. None of these studies tell us anything about economic law.

But for those of you who don’t believe me on the above points, I’ll give you a few of the near infinite number of ways that these studies could be flawed (beyond the inherent epistemic flaws, of course).

The studies which claim that an increase in the minimum wage will not decrease employment are usually industry specific. Even if employment remains constant in a given industry, this means nothing about employment throughout the whole economy. These studies will not capture all the people in other industries who lose work because of it.

Most of these studies also take place over a short period of time. While their fancy econometric methods make their models “time-independent”, there are time related factors that simply can’t be captured in these models. There are psychological aspects that may prevent an employer from firing workers immediately. But that doesn’t exclude the possibility (inevitability) that, over a period of several years, employment will be lower than it would have been absent the higher minimum wage. In fact, there is evidence that the negative effects of minimum wage manifest in a slower rate of job growth rather than immediate unemployment. If, like me, you are a nerd, I suggest you read that paper for more details. The conclusions are even stronger than I’ve mentioned here.

Here’s another possibility: what if the current minimum is below the prevailing wage for most workers? After all, the data from the demographics section above shows that there aren’t a huge number of people working at the minimum wage. If 99% of all workers are making at least, say, $10/hour, raising the minimum wage to $9/hour will, obviously, have a very small effect on total employment.

Ineffective price floor graph

These studies also do not include non-monetary compensation. It’s quite possible, for instance, that the delivery guy doesn’t get laid off because of a minimum wage increase, but instead has his mileage reimbursement cut. It’s also possible that workers will have their hours cut, but this won’t change the total amount of employment in these studies.

Then there are some more specific methodological problems. For example, in the Card and Krueger study, they used telephone surveys to find their employment data. Thomas Sowell did an excellent job explaining a potential problem with this:

“Imagine that an industry consists of ten firms, each hiring 1,000 workers before a minimum wage increase, for an industry total of 10,000 employees.  If three of these firms go out of business between the first and second surveys, and only one new firm enters the industry, then only the seven firms that were in existence both ‘before’ and ‘after’ can be surveyed and their results reported.  With fewer firms, employment per firm may increase, even if employment in the industry as a whole decreases.  If, for example, the seven surviving firms and the new firm all hire 1,100 employees each, this means that the industry as a whole will have 8,800 employees – fewer than before the minimum wage increase – and yet a study of the seven surviving firms would show a 10 percent increase in employment in the firms surveyed, rather than the 12 percent decrease for the industry as a whole.  Since minimum wages can cause unemployment by (1) reducing employment among all the firms, (2) pushing marginal firms into bankruptcy, or (3) discouraging the entry of replacement firms, reports based on surveying only survivors can create as false a conclusion as interviewing people who have played Russian roulette.”

There are many more complications with many of these new quantitative studies, which are described in horribly boring detail in this paper. In some cases, the results would have been completely different if the researchers sampled from a slightly different time period.

Alrighty then, I think you get the point: empirical studies of the minimum wage are problematic at best.

I’ve already mentioned a few ways that workers can be hurt by the minimum wage (and won’t show up in the research), but I think it’s important to go into a little more detail on the real consequences of the minimum wage.

Put simply, the minimum wage leads to higher unemployment among exactly those who the policy is intending to help: namely, the most disadvantaged members of society.

Even if, hypothetically, the total change in employment is negligible, a higher minimum wage will change the distribution of workers. Here is a graph for an example I’m borrowing from Robert Murphy:

Minimum Wage with inelastic demand

In this example, we have a very inelastic demand for labor. In laymen’s terms, this means that even large changes in the wage rate lead to relatively small changes in the quantity demanded of labor. This is an assumption that is very favorable to those who argue that the minimum wage doesn’t impact employment.

In this case, if the market clearing wage was $7.25/hour, and then we institute a $10.10/hour minimum wage, total employment will only decrease by 2000 people, which is a very small decrease from the 2 million we started with. However, the supply of labor has also increased, in this case, to 2.5 million. We have a “surplus” of about a half million unemployed people drawn to this higher wage.

Suddenly, employers can be a lot more selective. Mentally and physically disabled people can no longer compete, so the vast majority of them will lose their jobs or won’t get hired. Why would an employer take the risk? Similarly, teenagers tend to be more irresponsible and less experienced than college graduates. If an employer can choose between the college grad and the 16-year old, the choice is obvious. And this crowds out things like on the job training (analogous to unpaid internships), which allow those at the bottom to gain more skills and lift themselves out of poverty.

This also allows other factors, like discrimination and nepotism to come into play more forcefully. In order for a teenager to get a job, they’ll need to know somebody on the inside. Merit simply won’t be enough most of the time. And if an employer doesn’t like black people, you’d better believe he’s not going to hire them. It’s ironic that people who are most vocal about discrimination tend to be the very people who support higher minimum wages.

Realistically though, a higher minimum wage won’t just lead to these substitution effects; there will also be an increase in unemployment. I’ve already gone over a number of ways that this could happen, usually over an extended period of time. But just to make sure that you really, really get the point, here’s two more.

Besides replacing low-skilled workers with higher-skilled workers, firms will also begin to substitute labor in general with capital. This is a more long-term, structural change, but a rational response to an increase in the cost of labor. By automating tasks that would have been done by people at a lower wage, firms can reduce their dependence on labor and employ fewer workers.

Another possibility is that the most profitable firms remain in business without firing workers (although still hiring at a slower rate, most likely). However, the least profitable ones, aka the marginal firms, will go out of business. Of course, when this happens, people who were employed at these firms lose their jobs.

Okay, that’s all I’ve got. For those of you keeping score at home, I suggest you do your own research (or better yet, just listen to me unquestioningly). I’ve linked to multiple articles on both sides, so that is a good starting point.

 

How The Minimum Wage Benefits Politicians, Unions, And Racists

Despite all this, there are still some people who benefit from an increase in the minimum wage, and a discussion about this policy would be incomplete without considering their perspective as well.

Since low-skilled workers tend to get pushed out of work by a minimum wage, it is their substitutes who most obviously gain from it.

Let’s say the cost of fast food was artificially propped up. Purveyors of fast food may or may not gain from this, depending on the elasticity of demand. But a substitute, the late night pizza joint, will surely win out.

So, what are some substitutes for low-skilled workers? The most obvious would be unions. As Gary Galles explains:

“A higher minimum wage increases the demand for union workers by reducing competition from lower-skilled workers. For instance, if the minimum wage was $8 and the union wage was $40, employers give up 5 hours of low-skilled work for every union worker-hour utilized. But increasing the minimum to $10 means employers give up 4 hours of low-skilled work for every union worker hour.”

Similarly, businesses that already pay higher wages benefit from an increase in the minimum wage. It doesn’t affect them, but it does raise the cost of doing business for their competitors, allowing them to gain a higher market share. This is why it should be no surprise that the CEO of Costco has come out in favor of increasing the minimum wage.

Politicians will also benefit. Those who are in areas that are already higher paying will gain because of the substitution effects. Those who are in lower-income areas can gain by making more of the citizens in that area dependent on government largesse. Continue dishing out welfare, and continue reeling in votes. Yes, I’m quite cynical.

Some historical context will help shine some light on this issue. Minimum wage laws have been used openly in order to price minorities out of the market. For a few quick examples, see the second half of this article.

The most glaring case of this is South Africa under apartheid. White trade unions pushed hard for laws that mandated “equal pay for equal work”. The whole point was to prevent black laborers from offering their services more cheaply, and taking jobs away from the more expensive white laborers.

This included the Wage Act and the Mines and Works Act of 1926 (just two of many racist laws pushed by the white socialists), otherwise known as the “colour bar”. They were the result of the 1922 Rand Rebellion, when the mine owners attempted to replace white workers with lower paid blacks, even to skilled and supervisory positions. In order to protect their privileged economic position, the socialist white labor unions staged a rebellion. Ultimately, it was put down, but they were able to regain their legally protected racist privilege through a minimum wage that prevented blacks from competing.

The US has its own history of racism and minimum wage laws (see the controversy over the Davis-Bacon Act). But it’s not just about racism or economic advantage; real people are hurt by these policies. The most famous case is that of Jacob Maged, who went to jail during the Great Depression for the “crime” of pressing a suit for only 35 cents, when the Tailors’ Code of the National Recovery Act stipulated a minimum of 40 cents.

There was also Fred Perkins, who produced batteries, but paid his employees less than what the code mandated. He, too, went to jail. But his employees were content with the wages he paid them, even though they were half of what the NRA mandated.

This historical background, I think, is revealing of the true nature of wage controls.

 

Conclusion

I know this post had a lot of information to digest, including much that you may not have been familiar with. Here is a summary of the main points:

  • Most laymen that support the minimum wage mean well, but are unaware of the economic consequences of the policies they advocate.
  • Most minimum wage workers are young, and most aren’t living in poverty.
  • The minimum wage prevents consenting adults from engaging in a mutually beneficial economic transaction.
  • A higher minimum wage leads to higher unemployment, particularly among the most disadvantaged workers.
  • The minimum wage has been historically used as a tool for racism and economic gain for special interests.

It’s time we put an end to the minimum wage and its terrible consequences. If you have any questions or anything to add, please leave a comment.

Trackbacks

  1. […] feeding the homeless) starve to death. Due to acts of economic warfare against the poor such as the minimum wage, most homeless people have no way to make money except for panhandling. If laws like these don’t […]

  2. […] But what about living wages? There are so many problems with the concept of a “living wage” that it would be imprudent to go into too much detail here. Rather, I will discuss this very briefly and point you to my 6000 word tirade against the minimum wage. […]

  3. […] the government’s arsenal against the poor consists of far more than just welfare programs. The minimum wage prevents those who have the least skills from finding employment. Occupational licensure and regulations prevent individuals who do have skills from using them to […]

  4. […] do the same in order to prevent people from engaging in mutually beneficial business arrangements, selling their labor at an agreed upon price, or discriminating against certain groups of […]

  5. […] used to be debate over whether there ought to be a minimum wage or not. Now it is just a question of how high it should be set. There used to be a debate about whether a […]

  6. […] Minimum wage. Somehow, the idea of the minimum wage simply refuses to die. Despite whatever many leftists may say, the minimum wage creates unemployment. It can be no other way. A minimum wage of $7.25 is like saying: “If you are willing to work for a wage lower than $7.25/hour, too bad, you’re not allowed.” People who would have been able to find a job for only, say, $5/hour (perhaps because they are disabled or completely inexperienced and not particularly productive) are no longer able to. I wrote an extensive post railing against the minimum wage here. […]

  7. […] the state that should be the focus of attention. Leftists who support things like welfare and the minimum wage believe they are helping win some battles on behalf of the working man, but a far better solution […]

Speak Your Mind

*