Abolishing the minimum wage is one of those conservative policy positions that, if brought up within earshot of a person of the liberal persuasion, will cause an audible gasp in disgust. But why? Why is it that most Americans (two-thirds according to a 2010 poll) support raising the minimum wage to, for example, $10/hour? In my opinion, the answer is a simple one — extremely short term thinking. Conservative economist Thomas Sowell released a book in 2003 entitled Applied Economics: Thinking Beyond Stage One in which he examines economic policies not only in terms of their immediate effects, but also in terms of their later repercussions, which are almost always ignored. I would argue that the most glaring example of people failing to “think beyond stage one” and consider the repurcussions of their well-intentioned position is the widespread advocacy for constantly increasing the minimum wage.
The minimum wage is one of those economic policies that sounds so good, humane, and fair on paper, but when they are actually implemented in the real world, the results are not what their proponents aimed to accomplish (at least publicly). The first true federal minimum wage law was passed in 1938 during FDRs second term in office, setting the minimum wage at $0.25/hr. Since then, the minimum wage has been raised 23 times, eventually reaching its current level of $7.25/hr in 2009. So what’s wrong with the government ensuring that businesses pay their workers a minimum hourly wage? Isn’t that the moral thing to do?
What most people don’t understand is that the most basic effect of a minimum wage is that it removes the ability of an employer to pay their employees based on their value to the business. For example, if a young, uneducated and unskilled individual is seeking employment, he must find an employer that is willing to pay him $7.25/hr even though his skills and education, or lack thereof, may only be worth $5.00/hr to the business. In short, businesses are often required to pay workers more than they are worth.
So what effect does this have on the economy as a whole? Well, if employers are required to pay their employees more than they are worth to the business, that means employers can hire less people, thereby increasing unemployment. For example, if an employer has $100 to hire employees to work in its warehouse, and that employer is mandated by the government to pay each new worker $10/hr regardless of their qualifications for the job, he can hire a maximum of 10 new workers. However. if there were no minimum wage law, and the employer was free to pay each employee according to the value they are projected to add to the business based on their qualifications, experience, education, etc., then he could hire 20 less skilled workers at a $5/hr rate, thereby employing 10 more people than otherwise would’ve been hired at the minimum wage, while also increasing productivity.
And what happens when productivity increases? Well, increased productivity means increased profits, which in turn often results in expansion and/or hiring more employees, or perhaps raises for current employees. But the benefits aren’t limited to the business owner and his employees. The economy as a whole benefits because when employers can hire employees at the rate determined by the supply and demand of the market rather than government mandate, consumer prices drop due to decreases in labor costs and the increases in productivity, making products more affordable for the rest of America. On top of that, these unskilled and inexperienced workers that would be unemployed under a minimum wage are now able to find a job at an albeit lower wage, but they are able to gain invaluable experience and job training that will prepare them for promotion and/or higher wage earning jobs in the future. After all, statistics show that vast majority of minimum wage earners do not earn the minimum wage for long because theexperience and skills they learn while working that minimum wage job allow them to “move up the ladder”.
Liberals argue that every person is worth a minimum amount of money per hour, and thus employers must pay them that minimum amount, regardless of their qualifications, experience, education, skills, etc. They also argue that anything below the set minimum wage is not enough for an individual to live off of and make ends meet. But this argument is based on the false premise that minimum wage workers are impoverished and/or heads of household, and thus they need help feeding themselves and their families, with the minimum wage providing that extra help. First, it must be pointed out that, as of 2006, only 1.3 million workers in the US were making minimum wage, amounting to a mere 1.1% of the working population. Secondly, only 1 in 5 of those minimum wage earners lived in a family that earns less than the poverty line in 2006, and three-fifths of them only work part-time. Also, in 2006, the minimum wage-earners’ average family income was almost $50,000 per year, with a majority of minimum wage earners being young people under 25 years old with little to no employment experience. So despite the minimum wage advocates trying to frame the debate as if minimum wage earners are impoverished “family men” that need more money to feed their families, this is not the reality of the situation.
So now that we know who the minimum wage earners are, what does history tell us about what the minimum wage does to the economy and, more specifically, jobs? Well, according to the 1981 Report of the Minimum Wage Study Commission, minimum wage laws devestate the job market for young people, as exemplified by the fact that the 46% rise in the minimum wage between 1977 and 1981 destroyed 644,000 jobs among teenagers alone. As if the irony of liberal policies destroying jobs for one of their most faithful voting blocs, young people, isn’t enough, the negative consequences for another faithful voting bloc are very similar — African-Americans. Among unskilled and low skilled workers, black teens are disproportionately represented, thus making them even more susceptible to being overlooked by employers. This explains why unemployment among black teens has hovered around a staggering 40% for a while now, WAY above the national average. Throw in the fact that teen pregnancies are much higher among black teens, and you have a situation where the minimum wage is not only destroying jobs for black teenagers, but it is destroying jobs for a population full of single mothers and young black couples trying to raise their children.
But naturally, rather than unleash the free market by allowing the marketplace itself to set wages rather than government, thereby adding millions of new jobs to the economy that these young people can take to help feed their families, liberals simply say “well that’s what welfare is for!”. (BOOM! Heads explode) But that’s a discussion for another day. Today, we simply need to ask ourselves the question: Is 9% unemployment with a minimum wage of $7.25 better than 3% employment with no minimum wage at all? Well that depends on if you acknowledge the economic reality that Thomas Sowell acknowledges, which is that the minimum wage is ALWAYS $0.00. But those making no wages at all don’t count right?