When it comes to a mandated minimum wage, politicians irrationally trip over themselves in a classic case of good intentions, bad policy. President Obama has called for raising the minimum wage to USD $10.10 an hour. Hillary Clinton favors a $12.00 minimum wage, and Mr. Sanders supports the labor union call to raise the wage to $15.00 an hour.
Many believe that minimum wage laws are necessary to insure that low-skilled workers, especially new entrants, teens and minorities earn a living wage and are not exploited by greedy capitalists. But do minimum wage laws produce the desired results? The cruel and unspoken irony is that minimum wage laws do the most harm to the segments of our society that we seek to help: the unskilled poor and the inexperienced youth.
Intuitively, we all understand the fundamental principle of economics that when the price of anything increases, the quantity demanded of that good or service will decrease. The wage rate is the price of labor; if the cost of labor is increased via a government command, the quantity of labor demanded will decrease. Simply put, with other things constant, the number of jobs offered will decrease when the minimum wage is artificially increased. The case against minimum wage decrees is straightforward: increasing the cost of job creation will decrease job creation.
Even worse, the resulting decrease in employment becomes permanent as employers shift to labor-saving production technologies or to outsourcing abroad. True, those who keep their jobs will earn more, but others will lose their jobs or fail to get one when new jobs are not created. Many who live in poverty are unemployed and thus will not benefit from an increase in the minimum wage. In fact, their prospects for employment will diminish.
Let’s be clear, enacting a higher-than-market minimum wage does not result in a higher income for all workers, only for those who retain their jobs. This increase will be at the expense of those who will become or will remain unemployed. We know this and yet minimum wage laws remain popular with public officials, editorial boards and voters who want to express their compassion for the working poor.
A more cynical reason is that advocating for an increase in the minimum wage is a way of making political points without having to account for an increase in government expenditures since the cost is presumably borne by employers. Unlike government, however, employers cannot print money and the increased costs will be passed on to consumers in the from of higher prices, or will be shouldered by those that will not be able to find a job because their skills do not command a wage level theatrically dictated by government fiat.
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When government policy prices low-skilled workers and the inexperienced young out of the job market, skills atrophy, hope fades and tragically, unemployment becomes a way of life. Our current persistent unemployment levels among the disadvantaged may very well be the lagging effect of our unreflective support of minimum wage laws. Sixty years ago, the unemployment rate of 16- to 19-year-olds was less than eight percent. Today, after many rounds of minimum wage increases, youth unemployment is over 24 percent and close to 40 percent for black teenagers. Are minimum wage laws responsible for creating this new norm?
The idea that government can diminish poverty by making it more expensive for businesses to hire young and low-skill workers is illogical and worse, it is dishonest. If government can diminish poverty by enacting a $10.00 to $15.00 minimum wage, why stop there? Let’s raise the minimum wage to $90.00 an hour and eliminate poverty altogether. This is, of course, nonsense and so are minimum wage laws. We will not get good results from implementing a bad idea. Advocating for a higher minimum wage mandate is equivalent to advocating for higher unemployment.