Of Course Minimum Wage Reduces Employment

In his opus, Economics in One Lesson, Henry Hazlitt devotes an entire chapter to minimum wage laws. He’s quick to identify a semantic problem that lies at the heart of the debate on minimum wage.

“…for a wage is, in fact, a price. It is unfortunate for the clarity of economic thinking that the price of labor’s services should have received an entirely different name from other prices. This has prevented most people from realizing that the same principles govern both.

Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored”

Today Hazlitt’s gripe still rings true.

Presidential candidates Clinton and Sanders are calling for huge increases in the federal minimum wage (Clinton recently echoed Sanders’ call for a $15 federal wage floor). California and New York scheduled incremental increases in the state minimum wages to $15/hour by 2022 and 2021 (with New York’s timing of increase stratified by county). All this is sold to the public as a means to help poor workers, with rarely a mention of the costs of such policy, or who would bear those costs.

Despite a wealth of study on the subject and large consensus about the effects of price floors, economists aren’t speaking out against such an aggressive price-fixing scheme as loudly as one might think.

Twenty-four percent of economists surveyed by the University of Chicago disagreed that advancing the federal minimum wage to $15/hour by 2020 would reduce employment. That is, a quarter of economists disagreed that forcing employers to pay twice as much for labor would reduce their ability or desire to employ people. Fully 38% of economists surveyed responded that they were “uncertain.”

It’s hard to imagine economists making such a statement about anything else. For example: that doubling the price of  laptops would have no effect on the amount of laptops purchased. Since labor is purchased just like anything else, we can expect that making it more expensive will cause people to consume less of it.

Consider that when governments want to cut down on behaviors they deem harmful, one of their go-to tools is taxation aimed at increasing the price paid by consumers. Sanders understands that making people pay more for producing carbon means we will produce less carbon. Other politicians have proposed or implemented taxes on soda, tobacco, alcohol, and more activities in order to suppress demand for them. Yet apparently even economists fail to see the parallels between this and minimum wage.

As Hazlitt states, labor is best thought of as another good. Raising its price by mandate will yield the same effects as any other minimum price: some will be purchased for a rate higher than the free-market equilibrium, but a portion of the previously available supply will not. In other words, while some workers will get a raise, others will work less, be fired, or not hired to begin with and employers will enjoy less productivity from their workers.

No one—least of all economists—should be surprised to hear that setting the price of labor higher than people are willing to pay and accept will lead to less efficiency and productivity, nor that this would lead to slower job growth and less employment. We can even observe this happening during past increases of the minimum wage.

Minimum wage is rationalized as an intervention to alleviate poverty and give a leg up to the most vulnerable workers. However raising the minimum price of labor not only prevents consumers (employers) from buying labor beneath such a floor, but also prevents producers (employees) from selling labor below that cost. Since some people don’t have skills that are worth at least $15/hour to employers, they are going to have a much harder time finding employment under such a policy.

When we consider the people that most likely fit this description, the cynicism of minimum wage laws becomes clear. Those most unable to command premiums for labor–the young, poor, under-educated, and inexperienced—are the very people we purport to be helping! It’s no coincidence that minimum wage laws all over the world have roots in racism and ethnic nationalism. In many cases, their goal was to create unemployment among marginalized groups by eliminating their comparative advantage to native workers.

As for employers, it actually gives an advantage to bigger businesses and puts undue pressure on marginal producers (think mom and pop stores, rural and inner-city employers, etc.) who have smaller profit margins and must operate more efficiently. Quite bizarre for an election cycle marked by consternation of income inequality and skepticism of big business.

The ability to sell your labor competitively is important when you don’t have a lot to offer. We seem to understand the value of this for the affluent. No one thinks twice when a college kid takes an unpaid internship or starts volunteering to gain experience. If it’s fine to work for $0/hour, why not $1, $5, or $7?

The scale of federal minimum wage is what truly makes it a bad idea. It’s one thing to try to fix the price of a specific item in a given location (though it’s still a bad idea). But to impose a national price floor on all incarnations of labor should be unthinkable. To suggest that this won’t lead to any reduction in employment (especially in poorer places) is ridiculous.

Some proponents of minimum wage hikes seem to understand this, yet proceed regardless. Upon signing California’s minimum wage increase into effect, Governor Jerry Brown stated:

Economically, minimum wages may not make sense. But morally, socially, and politically they make every sense because it binds the community together to make sure parents can take care of their kids.

To be honest, I don’t understand the morality of pricing people out of work or making consumers spend more than they have to. Given that “57% of poor families with heads of households 18-64 have no workers”, I don’t think making them harder to employ is going to be beneficial to anyone.

It’s good to care about the poor and try to implement policies that help them, and to be clear, I’m not advocating that nothing be done. But economic policies should make economic sense, rather than being rooted in feel-good or politically expedient gestures. Minimum wages help some (often the wrong people) at the expense of others, who, now unemployable, are unable to gain experience that might lead them to prosperity or at least self-sufficiency. At the same time, the rest of society is robbed of the potential productivity of those victims of the wage floor.

After-market transactions (which I’ll get into next essay) are a much better method of helping the poor, precisely because they don’t distort labor markets or reduce demand for labor. Hopefully, our economists will soon get back to the dismal science and stop playing politics.

 

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7 thoughts on “Of Course Minimum Wage Reduces Employment

  1. Could you please cite some examples where minimum wage did in fact reduce employment significantly, where it’s not influenced by other factors such as recession or business cycle condition? I’ve heard this argument over and over again. However, ‘workers’ are people, their ‘wage’ is not another commodity, their wage is their living. Their wage is their dignity, their ability to provide for their family. If McDonalds rakes in billions in profit every year, what good reason can it be that they can’t pay their store workers better? The idea that low wage/low prestige jobs lead to higher wage, better prestige jobs is no longer true. The ‘experience’ you gain from working minimum wage jobs is no longer a ladder to lower or middle management or anywhere, it’s just flipping burgers. Under-educated people need to live too, under-educated people have children to feed as well, under-educated people have hobbies and leisures which deserve attention as well, being a lowly paid worker doesn’t mean your life and interest outside of earning a living isn’t important. ‘Wage’ in a vacuum is a commodity, but it’s not a vacuum, it’s people’s livelihoods. If upward mobility of some kind is still in effect today, I’d agree, minimum wage jobs lead to better wage jobs and better jobs, but they don’t. It has always been the goal of business owners/corporations to pay as little as they can get away with to those that work for them so that they can make more profits or reinvest in business and I have no argument there as long as the workers sees some share of that.
    Also, most unpaid college internships are done by choice. It’s out of desperation, hoping that if they slave away without even a daily stipend for lunch and gas will lead to a full time position, and that usually doesn’t happen either. Workers all over the world, even the educated ones with college and graduate degrees are being exploited. You have adjunct professors living out if their cars, people with PhDs and it’s driven by those ‘economists’ who think that wages are just a commodity.

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    1. Hi there! I’ll do my best to answer what I believe is the spirit of your question, but there’s a lot here that I think will be addressed in my next essay, which I hope you’ll read 🙂

      Your first question is sort of tricky to answer for two reasons: For one thing it’s hard to evidence businesses that didn’t open that would have under different circumstances. For another, as you stated, it’s impossible (or at least very difficult) to isolate things in the real world.

      Check this article out: http://politicalcalculations.blogspot.com/2013/03/the-deadweight-loss-of-minimum-wage.html#.VxYUYHBoywp It does a good job of compensating for these difficulties by showing that proportionately fewer people (aged 15-24) had income after the wage increase and that the total surplus to consumers and workers fell during this time period (which is exactly what we would expect a price floor to accomplish).

      As for the rest of your comment, the purpose of my essay was to remind people that wage is a price and is governed by the same laws as other prices (supply and demand). I wasn’t trying to make the case against anyone’s right to dignity or portray low-wage jobs as awesome vocations. The point I’m building to is that demand for labor is elastic and that raising the price of labor isn’t a very good means of alleviating poverty because it will have effects that extend beyond those intended, especially for marginal producers.

      Lastly, to your statement: “However, ‘workers’ are people, their ‘wage’ is not another commodity, their wage is their living,” you could say that the living of a farmer depends on the price of corn, and not labor. Would you then find a compelling case for a price floor on corn? We actually tried this in the 1900s and the unsurprising result was an absurd amount of unconsumed corn. I’m sure the analogy isn’t lost on you.

      The lesson is that you can create a price, but you can’t make people willing to pay it. For that reason, I believe that help to low-wage workers should be delivered in after-market transactions.

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      1. I enjoy reading essays from all points of view, so of course I will.
        Two things:
        First, your point “Your first question is sort of tricky to answer for two reasons: For one thing it’s hard to evidence businesses that didn’t open that would have under different circumstances. For another, as you stated, it’s impossible (or at least very difficult) to isolate things in the real world.” – I’ve heard this said along with the idea that if put a wage floor there will be fewer jobs in many of my college and high school economic classes. That to put a ‘price’ on anything is bad and we should let the market decided. I’d almost agree if it weren’t for the creation of multibillion dollar corporations, they CAN afford to pay workers better they choose not to because they can get away with it. As for “after market transactions” – regardless of what the minimum wage is, it doesn’t steer the cost of living to become lower. In fact, it almost always goes higher. And if a person’s wages can’t cover that, something/someone else will, such as public assistance or charity assistance, which then these low wage workers are called freeloaders. Rent is rent, regardless if someone makes $9/hour or $90/hour, meaning the rent, cost of food, utilities and gas will not adjust down (or up) according to someone’s salary. And now social services are being cut, public housing waiting list is miles long…there is really no relief except to raise wages and raise them in keeping with inflation and cost living. And with the lack of general upward mobility, the only way people can earn a living wage is to have some type of wage floor. Also the idea that minimum wage workers largely consists of people 16-24 is very harmful. It’s not true, many many people in their 30s and 40s are working right or just above minimum wage because they lost their jobs in the recession and they can’t replace the same job. 16-24 year olds can still live with family, most don’t have a family yet, they have time to learn new skills which pay higher wages, people in their thirties and older don’t have these options. What the science of economics leaves out is the social component, minorities and PoC are consistently stuck in low wage, low mobility jobs, are they inherently less qualified than their white counterparts? I don’t think so. Economics like all sciences measure numbers and raw data, they don’t look at the nuances behind those numbers, such as race, gender, educational level etc – they lump all low wage workers into one category, ‘low wage workers’.

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      2. Also, the argument that if you complain about your wages and artificially raise your wages with wage floor, you’ll lose the last shitty job you’ll ever work at is just propaganda. What you can prove on a graph or in economic theory doesn’t necessarily translate to real world, yes the are market forces, but government can play a hand too…are we all to subject ourselves to the ‘forces’ of the almightly market even at our own detriment?

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  2. Yes, very wealthy companies CAN afford to pay their workers more…I can afford a gold watch (maybe?), but that doesn’t mean I’m going to buy one. As long as employment remains a voluntary transaction it’s hard to believe that a wage floor doesn’t reduce employment opportunities (if not, why not just make the minimum wage $50/hour?–we’d all be rich!).

    I also never claimed that min wage jobs are only worked by 16-24-year-olds, that’s just who the article chose to focus on because they’re particularly vulnerable workers.

    My only contention in this article is that prices modify consumption patterns, and that that logic applies to wages just like other prices, which inhibits some from selling their labor (being employed). I never mentioned anything about social services, people’s personal lives, or much of what you brought up. As I said, I have an idea that I’m writing up, when I’m done I hope you’ll read it and tell me your opinion: love or hate 🙂

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