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.