The Minimum Wage: An Idea Whose Time Has Passed

by Feb 16, 2013Liberty & Economy, Video1 comment

Let’s declare that in the most indebted nation on earth, anyone whose job skills and productivity aren’t worth $9 an hour should live in poverty.

In his State of the Union Address, “President Obama called on Congress to raise the federal minimum wage to $9 an hour from $7.25 and to automatically adjust it with inflation”, notes the New York Times. Said Obama, “Let’s declare that in the wealthiest nation on earth, no one who works full time should have to live in poverty.”

In other words: Let’s declare that in the most indebted nation on earth, anyone whose job skills and productivity aren’t worth $9 an hour should live in poverty.

The Times does not some objections to raising minimum wage laws:

By making employees more expensive for companies to hire, some economists argue that higher minimum wages increase the unemployment rate — a particularly toxic possibility given the high levels of joblessness that remain long after the recession has ended.

Moreover, some economists, like David Neumark of the University of California, Irvine, have even argued that minimum wages are counterproductive at reducing poverty.

On top of that, conservatives have often argued that higher minimum wages burden job creators, especially during times when the economy is weak.

Some economists? Conservatives have argued? Here’s the headline of an editorial in the New York Times in 1987: “The Right Minimum Wage: $0.00” (h/t Economic Policy Journal). It argued that raising the federal minimum wage from $3.35 an hour was “a mistake”, that “there’s a virtual consensus among economists that the minimum wage is an idea whose time has passed. Raising the minimum wage by a substantial amount would price working poor people out of the job market.” A higher minimum wage “means fewer jobs”; it “would increase unemployment: Raise the legal minimum price of labor above the productivity of the least skilled workers and fewer will be hired.” In conclusion, “The idea of using a minimum wage to overcome poverty is old, honorable—and fundamentally flawed.”

Following Obama’s declaration, the Department of Labor weighed in (h/t EPJ):

The president’s plan to raise the federal minimum wage will benefit 15 million American workers, and have a positive effect on the economy. Still, there are some common myths about raising the minimum wage. We checked in with our Chief Economist Jennifer Hunt on the following three myths:

Myth: Raising the minimum wage reduces employmentFalse Minimum wage increases have little or no adverse effect on employment as shown in independent studies from economists across the country. Additionally, a recent letter by leading economists including Lawrence Katz, Richard Freeman, Joseph Stiglitz and Laura Tyson points out that “[i]n recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum wage workers, even during times of weakness in the labor market.

Ah, so it’s just a “myth” that increasing the minimum wage creates unemployment! Right? Well, let’s think about that for half a second. If that is true, why not increase the minimum wage to $50 an hour? Hell, why not $100 an hour? By golly, why don’t we just make the minimum wage $500 an hour, and that will totally eradicate poverty and make us all quite wealthy!

The great Murray Rothbard addressed the fallacy at work here:

In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.

All demand curves are falling, and the demand for hiring labor is no exception. Hence, laws that prohibit employment at any wage that is relevant to the market (a minimum wage of 10 cents an hour would have little or no impact) must result in outlawing employment and hence causing unemployment.

If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to disemploy, permanently, those who would have been hired at rates in between these two rates. Since the demand curve for any sort of labor (as for any factor of production) is set by the perceived marginal productivity of that labor, this means that the people who will be disemployed and devastated by this prohibition will be precisely the “marginal” (lowest wage) workers, e.g. blacks and teenagers, the very workers whom the advocates of the minimum wage are claiming to foster and protect.

The advocates of the minimum wage and its periodic boosting reply that all this is scare talk and that minimum wage rates do not and never have caused any unemployment. The proper riposte is to raise them one better; all right, if the minimum wage is such a wonderful anti-poverty measure, and can have no unemployment-raising effects, why are you such pikers? Why you are helping the working poor by such piddling amounts? Why stop at $4.55 an hour? Why not $10 an hour? $100? $1,000?

It is obvious that the minimum wage advocates do not pursue their own logic, because if they push it to such heights, virtually the entire labor force will be disemployed. In short, you can have as much unemployment as you want, simply by pushing the legally minimum wage high enough.

And Robert P. Murphy likewise addresses the problems with the idea of raising the minimum wage as a solution to economic woes in the above video.

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About Jeremy R. Hammond

About Jeremy R. Hammond

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1 Comment

  1. JV

    The problem isn’t that the minimum wage is to low. The problem is that the laws and regulations have been stacked in a way as to leave employees with no bargaining power any more. The people that make the rules keep choosing to cut them selves a larger and larger slice of the pie meaning every one that doesn’t make the rules gets a smaller and smaller slice of the pie.

    Unions used to act as a counter measure against this sort of thing but the people that make the rules have managed to make unions close to extinct. Companies can choose to change jurisdictions far easier than can employees. If a company wants to move somewhere governments will fall all over them selves to take tax money from workers and give it to the company to pay for the move. If an employee needs to move for work they are on their own.

    Companies are free to compare wages in the industry. It is a firing offence for employees to do the same. If you want to raise wages this would be a better place to start than raising minimum wages. Make it illegal to fire employees for comparing wages.

    Reply

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