, , , , , , , , , , ,

In a recent article the high cost of good intentions was mentioned .  A good example of this is the minimum wage.  The minimum wage is one of those things that was once considered unconstitutional but is now part of American life.  A MIT professor, most probably a Keynesian, stated recently that what the economy needed was a raise in the minimum wage.  If you are asking what is wrong with that than you might find the next few paragraphs enlightening.

The minimum wage became law under FDR. During the Great Depression a few states and President Franklin Roosevelt strongly supported the implementation of a minimum wage. For President Roosevelt the minimum wage was a consumer confidence measure. Roosevelt said he wanted a floor under the falling wages of the Great Depression. The logic being people would be much more likely to spend and plan if they knew there was a point under which their wages would not fall. (the ability of businesses to plan was never one of FDR’s considerations) Although declared unconstitutional a couple of times on the basis of it being an unlawful interference into the private contract between an individual and his employer the Supreme Court finally agreed to allow it in 1937 by a 5 to 4 vote.  Even though it was considered controversial at the time it now enjoys a lot of popular support.

Today the minimum wage is said to guarantee workers will be fairly compensated; of course fair compensation can mean totally different things to different people.  Whether a wage is fair or not depends on who you are talking to.  That being said you might be assuming that all the controversy over mandating a minimum wage came from employers but truth is that those most opposed to setting a minimum wage were workers.  The minimum wage cases that came before the Supreme Court all hinged on the rights of workers to work for whatever they found agreeable. The workers that appeared before the Supreme Court were fighting for their jobs and faced unemployment if the minimum wage was put into effect!  To understand this you have to understand the minimum wage.

The minimum wage does put a floor under the wages of low skilled workers just as FDR said it would.  It does make sure people that work are paid at least some minimum amount.  What people do not see is that the minimum wage like all involvement of the government in free enterprise comes at a cost.  It essentially declares at what point a worker is no longer productive enough to be employed. This function of the minimum wage is not spoken about when politicians (and activist parading around as economist) are trying to rally support for a new hike in the minimum wage. They say things like workers deserve better and $X per hour is not too much to ask, what you do not hear them say is no one who is not worth $X per hour should lose their job although that is exactly what they are saying.  If it is not economically viable for a business to pay an employee $X dollars an hour for a particular job then they must get rid of that employee. Many of those not worth $X are teenagers and those just getting into the workforce. Minority teenagers who often attend substandard schools and live in areas where businesses are struggling anyway are often hardest hit.

It should not be hard to understand that when wages are forced to be raised arbitrarily, not due to any particular economic cause but because the government declares it so, it upsets the natural balancing mechanisms of the free market.  Employers adapting to the higher wages are faced with difficult but simple decisions.  Raise prices in hopes their products will still sell enough to cover the higher wages, a process limited by competition, or let some people go and try to use other means to make the rest of the workers productive enough to justify their pay.  The successful businesses usually do a little of both.  Those businesses that can not adapt to the new wages simply cease to exist along with the jobs they once supported.  The result is higher unemployment.  Unfortunately this does not stop at the lower paying jobs.  Jobs higher up the ladder are also affected by a domino effect on other wages.  If the entry level floor sweeper gets X amount than the second level floor sweeper will need to be paid X+ and so on up the ladder.  The affect can increase unemployment even among those who are not directly effected by the increase in minimum wage.

The examples of this is intertwined with our lives and history but overlooked by most. When this author was a teenager seeking a job pumping gas the station owner informed him that “thanks to the state raising the minimum wage I can not afford to hire kids anymore, I have to go self-serve”  Through the years this is story that has repeated itself many times. The local grocery store quit hiring baggers; they became an expensive luxury after a raise in the minimum wage. After another raise in the minimum wage the local golf course stop hiring teenagers with push mowers to mow the grass and bought a commercial riding lawn mower instead. If fact there is example after example of the minimum wage destroying jobs and putting people out of work.

It should not be surprising that study after study has shown conclusively that raising the minimum wage always results in higher unemployment. Those that stay employed are seen as better off but no one cries for those who are now unemployed. Like was stated previously, these are for the most part teenagers and those just starting out or starting over. A few are very low skilled workers (like the uneducated and the handicapped) whose productivity level is too low to justify paying them a higher wage. After each raise in the minimum wage the task of finding work becomes more difficult for these groups. One of the most significant examples in history is the unemployment rate among poor inner-city minorities in the U.S. Historically black teenagers were employed at the same rate as whites, but when the minimum wage zealots went to work and started substantially raising the minimum wage in the early 1960s black unemployment skyrocketed.  This is because of two reasons: The primarily black inner-city represented an area that was expensive to start and run a business; these businesses simply did not have the profit margins to pay the higher wages. Additionally inner city school kids often receive a substandard education that limits their productivity. White teenagers have also suffered but statistically not nearly as bad as the black teenagers. This is a trend that has only worsened over time.

Another travesty of the minimum wage is that raising it is pushed the hardest at times like the present when it does the most damage. In economic downturns when every job is precious and businesses are at their most vulnerable is the exact time many politicians push for hiking the minimum wage, pushing both people and businesses out of the marketplace.

With it comes to the minimum wage the cost of ignorance can be very high.

The Conservative Mind

“If this article makes you think pass it on”