On Minimum Wage

One of the major differences between leftists and conservatives on economic policy is minimum wage. In general, leftists support a relatively high minimum wage (which they call a “living wage”) and conservatives argue that minimum wage should be lower or even non-existent. Leftists argue that a high minimum wage is necessary to reduce poverty and improve the quality of life for low income workers, but conservatives point out that a higher minimum wage has the effect of increasing unemployment — meaning that those minimum wage workers who do have a job have a higher quality of life, but there are also more would-be minimum wage workers who are unemployed and who obviously have a lower quality of life.

While the political debate over minimum wage rages on between leftists and conservatives, there is actually very little debate among economists that minimum wage is at best of dubious benefit and at worst economically foolish: the vast majority of economists (about 79%) agree that a minimum wage increases unemployment among young and unskilled workers (which are the very workers who are supposed to benefit from a minimum wage). Moreover, there is ample empirical evidence supporting the conservative and economists’ position that minimum wage increases unemployment. For example, just recently Walmart canceled plans to add three stores to Washington, D.C., when the D.C. Council voted to raise minimum wage there — so anyone who might have gotten a job at one of those Walmart stores is left unemployed. More generally, economist Walter Williams cites a study which

…focuses on 16-to-24-year-old male high school dropouts, understandably a relatively inexperienced group of labor market participants. Since minimum wage laws discriminate against the employment of the least-skilled worker, it shouldn’t be surprising to find 16-to-24-year-old male high school dropouts its primary victims.

Among the white males, the authors find that “each 10 percent increase in a state or federal minimum wage has decreased employment by 2.5 percent; for Hispanic males, the figure is 1.2 percent.

“But among black males in this group, each 10 percent increase in the minimum wage decreased employment by 6.5 percent.”

The authors go on to say, “The effect is similar for hours worked: each 10 percent increase reduces hours worked by 3 percent among white males, 1.7 percent for Hispanic males, and 6.6 percent for black males.”

[The authors] compare the job loss caused by higher minimum wages with that caused by the recession and find between 2007 and 2010, employment for 16-to-24-year-old black males fell by approximately 34,300 as a result of the recession; over the same time period, approximately 26,400 lost their jobs as a result of increases in the minimum wage across the 50 states and at the federal level.

Interestingly, the negative effect of minimum wage on unemployment is worst for young black men. Normally leftists make the accusation that policies which are more harmful to blacks or other minorities are “racist” or “sexist” but they are predictably silent on this issue since they support a higher minimum wage.

To understand exactly why minimum wage increases also increase unemployment, one must first understand that employers and workers are engaging in an economic transaction for labor. Employers demand labor for their businesses and workers supply labor in exchange for wages and other forms of compensation (e.g. benefits). As in any economic transaction, the supplier has a minimum price at which he is willing to supply an economic good and the buyer has a maximum price at which he is willing to buy that good. In this case, the supplier is a worker with a minimum price (wage) he is willing to supply laber (e.g. no one is going to work for $0.01/hour), and the employer has a maximum price (wage) he is willing to pay for that labor. In order for the economic transaction to be completed, the worker and employer must have an overlapping range of wage values they will agree to — which means the worker’s minimum wage must be lower than the maximum wage the employer is willing to pay. However, if the government imposes a minimum wage law which is above the employer’s maximum wage then no economic transaction takes place — i.e. the potential employee is left without a job.

To illustrate this principle with numbers, suppose an employer expects to earn $10/hour by hiring a worker. This $10/hour is the maximum wage he is willing to pay, because if he pays higher than that he will actually lose money by hiring the worker. A worker will attempt to extract the highest wage possible from this employer, but he will not be hired unless he is willing to accept a wage less than $10/hour. If the worker is willing to work for a minimum of, say, $5/hour, then the worker and employer will be able to agree on a wage between $5/hour and $10/hour. The problem with a minimum wage law, however, is that if the minimum wage is greater than $10/hour then the worker will not be hired even if the worker is willing to work for less than $10/hour. In that case the government has prevented the economic transaction from taking place, and the would-be worker remains unemployed and the employer is unable to grow his business. Worse, the unemployed worker is unable to gain experience and reputation to improve his skills and ability to obtain other jobs (which may pay higher than minimum wage). The worker is thus stuck looking for no skill, minimum wage jobs, which he may never be able to find if the government mandated minimum wage is too high.

The conservative position is that the government mandated minimum wage should either be low or non-existent. While this would appear to help greedy business owners reap higher profits at the expense of their minimum wage workers, in actuality both the owner and worker may benefit. Workers are free to choose between accepting a low paying job (and possibly looking for a better paying one while gaining skills and experience) or remaining unemployed (no one is forced to take a job, so if it pays too little the worker can simply reject the job offer). Meanwhile, business owners are able to expand their businesses by hiring workers to do jobs which do not earn enough to support whatever high government-mandated minimum wage (“living wage”) leftists arbitrarily choose. So long as the economic transaction (job hire) takes place, both the business owner and hired worker benefit (otherwise either the owner or worker would refuse to enter into the transaction). While minimum wage workers (indeed, all workers) would obviously prefer to receive higher compensation, the fact that the worker has accepted the job is proof that the compensation is sufficient. A low or non-existent minimum wage law thus offers workers and employers the most economic freedom and does not artificially and unnecessarily increase unemployment.

Advertisements

5 thoughts on “On Minimum Wage

  1. “While minimum wage workers (indeed, all workers) would obviously prefer to receive higher compensation, the fact that the worker has accepted the job is proof that the compensation is sufficient.”

    No, it is only proof that they accepted the compensation. It does not give anything more than that.

    • It is proof that the compensation is sufficient for them to accept it and work the job rather than decline it, otherwise they would have declined it.

      • No, you are still implying their motivation. You have made a complex situation into a simple equation of sufficiency.

  2. Pingback: On the Gender Wage Gap | The Nullspace

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: