Saturday, December 30, 2006

The Minimum Wage Myth

I just received a raise. Before you congratulate me, let me first say that I didn't want the raise. At least not the way I received it.

My state just hiked the minimum wage by about a dollar. The reasoning was to economically "help" the lower class people of my state. Namely people like me who are on minimum-wage jobs. This seems to be a general attitude about the minimum wage laws...that it helps the poor. Take from those greedy businessmen and give to the starving lower class.

Unfortunately, business owners, unlike the Hollywood cliché, aren’t rolling in cash. Most business owners are small business owners. They have a mom-and-pop store and are just trying to barely scrape by. Like most Americans, they are struggling to make ends meet.

When the minimum wage laws are hiked, these mom and pop stores suddenly have more costs. They aren’t magicians. They can’t print more money like the government can. They have to get the extra-money to fund the new costs somehow...and it’s the “somehow” that debunks the minimum wage myth. There are two basic ways that businesses are able to offset the new costs imposed by a minimum-wage tax-hike.

1. Businesses raise prices

The increased minimum wage means increased expenditures. One way of fixing the balance is not to cut costs, but to increase income. One way of doing that is by “slightly” increasing prices. With slightly increasing prices, consumers endure the brunt of the negative impact of the minimum wage laws. Guess what economic class is harmed the most? That’s right, the poor.

The poor are harmed most with the slightly increased prices because when all the dimes and nickels add up the ratio of their paycheck is much higher. So the poor are harmed by a law passed by our government to help the poor. Ironic isn’t it? Government usually is.

The second affect of higher prices is the fact that the people have more money. Basically, they have more dollars, but the dollar has lost some of it’s buying power. Economists have a name for this. Inflation. Inflation has an incredibly large number of harmful economic impacts, from weakening the buying ability of people’s savings, to the undermining of a fixed exchange rate in international trade, along with others.

End Result 1: Poor harmed with higher prices.

End Result 2: Inflation increased

2. Businesses lay employees off

Strictly economically speaking, employees are a cost to a business. They “cost” money. Decreasing this cost is a way to offset the new costs of the minimum wage. It’s a way to counteract what the economic strain which government has done. To decrease the cost…the only option is to fire workers somewhere near the bottom of the totem pole.

More specifically, when it comes down to choosing who keeps their job and who is laid off, business managers inevitably are going to choose the already disadvantaged, for business purposes.

As Lawrence W. Reed explains:

“The minimum wage law prices many of the inexperienced, the young, the unskilled, and the disadvantaged out of the labor market. (For example, the minimum wage provisions passed as part of another act in 1933 threw an estimated 500,000 blacks out of work).” [1]

Why on earth would the minimum wage harm blacks more than whites? The answer can be found in the how the minimum-wage works. A minimum wage law can be interpreted two ways.

Interpretation A: The minimum wage is a restriction on businesses. It’s function stops businesses from taking advantage of impoverished people who are willing to take an extremely low paying job. Interpretation A is often the only interpretation which is considered when looking at minimum wage laws. Nevertheless, we should be able to see that there is another interpretation.

Interpretation B: The minimum wage is a restriction on employees. Its function is to restrict employees so that employees are not able to underbid other applicants for a job in a competitive situation.

White South African labor unions supported minimum wage laws to harm black job applicants. By putting a minimum wage on the blacks, the blacks could no longer underbid their white counterparts, meaning that the blacks where the ones who suffered because of the racism. A similar end result happened here in the US with the first minimum wage law. That’s why an estimated 500,000 blacks lost their jobs.

The Cato Institute analyzed the effects of the 1990-91 increases in the federal minimum wage, in a review entitled “Sense and Nonsense on the Minimum Wage” The result of the study? The people who were affected by the minimum wage lost jobs. Unemployment.

“As is true with age, when we divide the population on the basis of education, ethnic group, or marital status, we find that the group with the highest percentage of low-wage workers is also the group in which employment shows the greatest drop.” [2]

These facts are hard to argue with. As a matter of fact, a 2003 poll indicated that 46% of economists agreed that “a minimum wage increases unemployment among young and unskilled workers.” 28% agreed partly, and only 27% disagreed.[3] That’s almost a 2-to-1 ratio of economists who say that minimum wage laws end up increasing unemployment.

I only wish we could have such consensus on other things.

End Result: Unemployment increased.

Given the extremely limited options small-businesses have for acquiring the money to pay for the wage increases the result is nothing but disastrous. Unfortunately, the truth gets lost somewhere in a pile of statistics, as it is a lot of economic issues.

Every time the minimum wage is increased, our buying power is decreased. Every time prices go up, someone has to change their lifestyle – for the worse. We must remember that every time the unemployment rate goes up to any extent at all, someone’s life has been turned upside-down. Poverty is increased. This isn't just about statistics anymore -- this is about real situations. Real lives being turned inside out.

Poverty puts people in seemingly hopeless situations. Economic strain can and has caused relationship strains which have escalated into divorces, aggravated alcoholism, brought about drug addictions, encouraged suicide, etc. These are real harms against real people…unsuspecting victims of political law which doesn’t take into account reality.

Something’s gotta give.

[1] Lawrence W. Reed, Great Myths of the Great Depression Mackinac, Center for Public Policy, 1998

[2] Donald Deere, Kevin M. Murphy, Finis Welch Sense and Nonsense on the Minimum Wage The Cato Review of Business & Government 1995 Vol. 18 No. 1

[3] Dan Fuller, Doris Geide-Stevenson, Consensus Among Economists: Revisited Journal of Economic Review, Vol. 34, No. 4, 2003, 369-387


bob said...

I also received my first raise because of the raise in minimum wage…..I was being paid 2.65 per hour my raise was raised to 3.65 per hour…..even then I felt I did nothing to receive such a raise…after nearly 30 years I still feel like I took something I did not deserve. I was told by my elders of the day if I work hard my employer would give my a raise…if he didn’t his competition would….and they are still right!

Jonathan (fromtheTPBoards) said...

Great post, Shaun!