On the Refusal to See the Harm Minimum Wage Laws Cause

by Oct 19, 2016Liberty & Economy9 comments

The New York Times building in New York City (Haxorjoe/Wikimedia Commons)

The New York Times advocates increasing the minimum wage while refusing to see the evidence of the harm caused by outlawing jobs.

A New York Times article this week on the huge number of men who aren’t part of the labor force included this comment:

Increased automation and the offshoring of jobs have hit men with less than a college education particularly hard.

Which is to say that minimum wage laws have hit men with less than a college education particularly hard. Of course, the Times advocates increasing the minimum wage.

One argument advocates of a higher minimum wage make is that it wouldn’t result in higher unemployment. But there it is, right in front of them. Naturally, outlawing jobs and removing the bottom rungs of the ladder disproportionately harms the most undereducated and underskilled workers. This is an effect that the Times and other advocates of minimum wage laws refuse to see.

As Murray N. Rothbard astutely observed:

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….

Ironically, for sensible commentary on the minimum wage, we can turn to the New York Times of a bygone era. As I’ve previously observed,

It editorialized in 1987 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.” The title of the editorial was “The Right Minimum Wage: $0.00”.

Naturally, the consequence of outlawing jobs — which is what minimum wage laws do — is to create unemployment. And naturally, exacerbating unemployment and making it harder for people to earn a living exacerbates income inequality by pricing new entrants into the workforce or low-skilled workers right out of the market for labor.

Then there’s New York Times columnist and Nobel Prize-winning Keynesian economics Paul Krugman. He also today advocates a higher minimum wage. Yet in his own economic textbooks, he points out how minimum wage laws cause harm by creating unemployment.

Here’s Krugman writing in 1998 on the subject:

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment…. Clearly these advocates [of increasing the minimum wage] very much want to believe that the price of labor–unlike that of gasoline, or Manhattan apartments–can be set based on considerations of justice, not supply and demand, without unpleasant side effects…. In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.”

And in his own textbooks Macroeconomics (2009) and Essentials of Economics (2011), Krugman writes:

This is what happens when there is a price floor on the wage rate paid for an hour of labor, the minimum wage: when the minimum wage is above the equilibrium wage rate, some people who are willing to work — that is, sell labor — cannot find buyers — that is, employers — willing to give them jobs.

With advocates of minimum wage laws like these, who needs opponents! Far be it from the New York Times and its pundits to let Econ 101 get in the way of political ideology.

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About Jeremy R. Hammond

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  1. Ken Willingale

    In the UK may workers on minimum wage cannot afford to live and therefore are paid benefits (housing,child etc) by the Government to make up the deficit which allows them a roof over their head and enough to feed themselves and the family. This is in effect a Government subsidy to many Companies/corporations allowing the Companies to maintain/increase profits and Shareholders dividends at the expense of their workers. Surely a good reason to have a minimum living wage ?

    • Jeremy R. Hammond

      I don’t understand what you mean saying the UK’s welfare program is an effective subsidy to corporations. Could you please explain?

      I don’t think there is ever a good reason to outlaw jobs. It is better for an underskilled worker to have a low paying job than no job at all. The high cost of living is not a reason to outlaw jobs; on the contrary, it’s a reason to end the government’s massive interventions into the market, including the central banks’ inflationary monetary policies, which certain do serve as an effective subsidy to privileged financial sectors. The banks’ artificially low interest rates (a form of price fixing, just like minimum wage laws are price fixing) don’t stimulate real growth, but cause malinvestment and illusory bubbles, which inevitably burst, leaving workers struggling to make a living. The solution to one kind of price fixing isn’t to implement another kind, but to just stop all the price fixing and let the market’s pricing system function to more efficiently direct scarce resources toward productive ends. That is the way to improve society’s standard of living and address the problem of high cost of living.

      • Ken Willingale

        Every person living in a civilised society deserves a roof over their head and food to live on and in my opinion a Health service as well, no different to a Police or Fire service. If somebody in the UK is earning the minimum wage and cannot afford to pay for housing they get a housing benefit to top it up which is paid directly to who ever provides the housing. (there is limited social housing left so usually private Landlords) The Government is making up the deficit in the minimum wage to allow this person to live. If the Company paid an acceptable living wage the Government would be better off as it would have no housing benefit to pay out. Yes prices would go up but everyone would have a choice whether to buy the service or product. IT and AI along with driverless cars etc will ensure there is never going to be full employment in the future and the only way to ensure a just and fair society in the future will be for Government intervention. Free markets will never solve the problem without intervention. As for interest I don’t see why if I want to borrow money I shouldn’t pay for the amount of money I want plus a fee on top. No different to buying a washing machine, pay for the manufacture plus the profit margin. Paying interest just fuels the inequality in society as it acts as a wealth transference mechanism with the top 10% receiving twice as much interest as they pay while the bottom 80% pay twice as much interest as they receive. Check out Margrit Kennedy’s work. Get rid of the Fed and Bank of England and let Government take back control of the money supply with a sovereign money system with democratic and transparent controls in place. Sorry I’m not an economist but do believe in a free and just society for all and free market capitalism isn’t interested in that. http://positivemoney.org/ Love the work you do on the Palestinian conflict.

      • Jeremy R. Hammond

        Hi Ken,

        You appear to have a misunderstanding about two key points: what rights are and how the market functions.

        One, you say individuals “deserve” to have a right to food, housing, health care, etc., which I take to mean you think individuals have a right to these things. But nobody has a right to any of these. Sure, if you want, e.g., food, you have a right to grow it, or to engage in exchange for it in the marketplace. But you don’t have a “right” to have others provide it to you.

        Two, you express several misconceptions about the market.

        On this count, you first imply we need minimum wage laws so people can earn a living. But this overlooks the points I made in the post; again, outlawing jobs doesn’t help the most vulnerable people, but hurts them. It’s better to have a low paying job than to be unable to get a job at all.

        You suggest that automation will cause unemployment. But this just isn’t so. I wish it were! If robots could do all the work that needed to be done for us to have a very high standard of living, so that nobody had to work at all, that would be a utopia. In reality, there is always a demand for labor. Yes, technological advancements can cause shifts in employment, but not net unemployment. Should we lament the automobile industry for putting carriage makers out of work? Technological advancements simply allow labor to be freed up from some areas so it can then be directed toward other areas, the consequence of which is an overall improvement in society’s standard of living.

        On the basis of that fallacy, you assert that the market cannot solve the problem, that government intervention is required to maintain full employment. But government bureaucrats making decisions at best arbitrarily do not know better than the market with its pricing system how to efficiently direct scarce resources toward productive ends. While if left to the market, productive labor would simply shift to where it was needed, when government intervenes, it only causes misallocation of resources that introduce inefficiencies into the marketplace. If government bureaucrats want “full employment”, they can pay half the unemployed to go around digging up holes and the other half to go around filling them in, but this harms rather than helps the economy because it’s simply a waste of resources that otherwise could have been directed toward productive ends.

        I’m confused about your view on interest because you agree on one hand that it’s reasonable to pay a fee on top of the principle of a loan, which suggests you have no problem with interest (since that’s what interest is), but then you say interest fuels inequality, which suggests you think charging interest is wrong. You’ve correctly hit on one of the problems in our society, but misidentified the root problem. The problem isn’t interest, which is just the price of borrowing money (why should a lender take on the risk of making a loan without the incentive of getting a return on that investment?) The problem is the Federal Reserve system and how it creates dollars out of thin air. It is the Fed’s inflationary monetary policy, not the charging of interest per se, that results in the upward wealth transfer you speak of.

        You suggest as a solution to this problem that the government rather than private central banks should control the money supply. This is not a solution. First of all, to clarify, the Fed is not a market institution. It is, on the contrary, a government-legislated private monopoly. Second, taking this monopoly control out of the hands of the Fed’s Board of Governors (which is appointed by the government) and putting it in the hands of the Congress doesn’t resolve anything. On the contrary, it just makes the system even more ripe for abuse. The solution is to eliminate the monopoly control over the money supply, period. Allow competing currencies and let the market determine the money supply.

        Last, you say free market capitalism isn’t interested in a free and just society. Well, the free market isn’t “interested” in anything. I just is what it is. But if we understand this to mean that the free market is contrary to the goal of a free and just society, this belief is simply wrong. On the contrary, it’s called the free market because it’s just that: free. The enemy of this freedom is the very government you would have “solve” such problems as the above by infringing on individual liberty. As for society being just, along the same lines, while the free market is perfectly compatible with a just society since it is premised on individuals making voluntary choices, the system you prefer of market intervention is premised on the threat or use of force to compel individuals against their will to behave the way bureaucrats want them to. That is very far from a meaningful concept of justness.

      • Moore Elizabeth

        People do have a RIGHT to have food and shelter. This means that they have a RIGHT to a minimum level of wages when they WORK so that they are able to provide for themselves. And, BTW, one cannot grow food for themself without (1) land to grow it on; (2) a source of water, and (3) the seed to grow the food. Once again, if wages are inadequate to pay for even these things, human rights are violated.

      • Jeremy R. Hammond

        People do have a RIGHT to have food and shelter.

        No, they don’t. See my above comment for the reason that’s a logical fallacy.

  2. Moore Elizabeth

    Using current US data regarding what it costs to simply live (no luxuries, no vacations, no time off from work, and not including any medical costs), the current minimum wage of $7.25 per hour is about $700 under cost. Currently, the average rent for a one bedroom apartment is about $871/mo; utilities (heat, phone, electricity, water and trash pickup), $253/mo; clothing costs (family of 4) $200/mo; food, $600/mo; and use of public transporation to get to work, $225/mo. Note that this budget does not include any allowance for medical expenses at all. The total amount of money that a family MUST have just to live a minimum lifestyle is about $2150 per month. A full time minimum wage job only pays $1450 BEFORE TAXES. This is why there are hundreds of thousands of HOMELESS PEOPLE who actually work every day–the pay is so low that they cannot afford a place to live. If the minimum wage were allowed to slide to even lower levels than it is now, it would spell personal and economic disaster for hundreds of thousands of families. It would literally lead to a Dickensian nightmare of a society with people living on the streets if they weren’t fortunate enough to have a car to live in. I cannot understand why anyone should be willing or forced to accept slave wages in exchange for their labor. It is NOT better for a person to be a near slave than to have no job at all, especially if their earnings will not even allow them to live a minimally dignified life.

    • Jeremy R. Hammond

      You are simply ignoring the points I made in the article.

      Your argument boils down to “If the minimum wage were allowed to slide to even lower levels than it is now, it would spell personal and economic disaster for hundreds of thousands of families.” This ignores the fact that minimum wage laws themselves spell disaster for untold numbers of people who find they cannot get a job at all as a result. With the bottom rungs of the ladder removed, they cannot even get a step up to gain experience and skills necessary to improve themselves advance into higher paying jobs.

      Actually, I shouldn’t say you ignore that point; you do address it by asserting that it is not better for a person to have a low paying job than no job at all. Well, you’re entitled to your opinion, but I personally would rather have a low paying job than no job at all, and I think it’s probably safe to assume there are many jobless individuals who feel the same way.

    • Kennon Gilson

      Libertarians have the right idea. The answer is end the zany government regulations in housing, public transport, small/home business, and other areas that raise living costs.
      Meanwhile, most families do the sensible thing–own a home, grow food, and have several adults earning.


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