“There are countries in Europe that would love to have their unemployment rate fall to the 5.7 percent unemployment rate to which ours has risen. Yet those who seem to want us to imitate European economic and social policies never seem to want to consider the actual consequences of those policies. “Unacceptable” is one of the big weasel words of our time– almost always said when the person who says it has no intention of doing anything, and so is accepting what is called “unacceptable.”” — Thomas Sowell
Archive for the 'Minimum Wage' Category
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In a growing economy the effects of the minimum wage will be harder to see, not so in a slowing economy.
Economics professor Perry writes, “Accoding to BLS data on unemployment rates by age, it looks like almost all of the .50% increase in May unemployment to 5.5% from 5% in April was due to increases in the jobless rates for young workers in the 16-24 year age group, especially the 16-19 year group (see chart above). For workers 25 years and over, the jobless rate has remained pretty stable at around 4%, compared to large increases from April for 16-19 year workers (+3.3% to 18.7%, the highest rate since 1993) and 20-24 year olds (+1.5%). “
From an old speech but just as relevant today as it was then.
“I just read a very interesting article by Thomas C. Leonard, Protecting Family and Race: The Progressive Case for Regulating Women’s Work, which appeared in the American Journal of Economics and Sociology in July 2005. If you’re at all interested in Progressive Era economists’ and reformers’ attitudes toward working women, this article is a must read. More generally, Leonard, in this and other pieces, notes that many Progressive Era reformers supported “protective” labor legislation even though they knew that it would lead to unemployment, especially among women, immigrants, and African-Americans. Rather than being disturbed by this side effect of the legislation, many reformers argued that the disemployment caused to these groups was a social benefit, because it prevented “inferior” workers who were willing to accept low wages because of their low consumption from driving down wages for a white Anglo-Saxon Protestant male workers, who needed higher wages to support themselves and their families”. — David Bernstein, professor at the George Mason University School of Law
Gary Becker, Nobel Laureate in economics, writes:
Unions always favor increases in minimum wages, even when as in this case the minimum only apply to some employers. Any increase in the minimum wage would raise the demand for unionized skilled workers who would substitute for the less skilled employees displaced by the minimum. Unions have an additional reason to try to raise the costs of big box companies like Wal-Mart’s since these companies do not have unions, and aggressively oppose them. Higher costs forced on non-union companies reduce the competition they offer to unionized companies.
The full post can be found here.
Current teenage unemployment rates for April 2007:
All teenagers: 13.3%
Black teenagers: 30.6%
Male black teenagers: 34%
Female black teenagers: 27.4%
The Bureau of Labor Statistics (BLS) recently released its unemployment rate for the year and a look at the report, see here, shows that many states (15 or so) have reached or surpassed their historically lowest unemployment level on record.
Is it a mere coincidence that at a time when the minimum wage is at a historic low that we also find many states dropping to some of their lowest levels of unemployment in history? Those who advocate for a minimum wage would say yes, those of us who know the minimum wage increases unemployment would say no the two go hand in hand.
Again, I must repeat, the fight to increase the minimum wage is not about the poor, it is about politics and it is politics at the expense of the poor and minority.
Most of you have heard the standard arguments against the minimum wage – that it is a weak poverty reduction tool, it increases prices, increases unemployment, hurts small businesses, makes the economy less efficient, etc, etc, but what I want to write about today is the harm done by the minimum wage that is least discussed – its affect on minorities, especially poor and unskilled minorities.
Have you ever wondered why poor areas have more empty lots than rich areas? Why unemployment is much higher in poor areas than in rich areas? Why minorities, especially blacks, high school drop outs and those with the least amount of skills have a harder time finding a job than others? A lot of the reason for all of this is the minimum wage, and that is what I want to write about today.
Before I go on, we have to ask who is on the minimum wage? If you look at government stats (see here, here and here) you will see that most of the people that are on minimum wage are part time workers and a full four-fifths of all minimum wage workers are not poor. People like, stay-at-home moms who want to supplement their full-time spouse’s earnings, teenagers working after school, and other students. These are students that tend to live in good neighborhoods, are relatively well educated, and are already doing okay, being that mommy and daddy pays most of their bills. Of course there are some ‘single mothers of four’ and other truly poor people living on the minimum wage but they are an extremely small percentage, by far the bulk of people on the minimum wage are young college kids starting their working lives. In addition, most people on the minimum wage are on there for a relatively short amount of time. In other words, the minimum wage is only their first step in a long road ahead of higher wages and more opportunities. The minimum wage in this respect is the gate way, the entry point, where an employer takes on a relatively small risk to hire you and see what you can do, after all, a teenager fresh into the work force has little to no work experience to be evaluated on.
Okay, so what happens if the minimum wage starts to increase? While economists may disagree on the magnitude of the effects of the minimum wage, here are a few things that economists universally would agree, and all things that primarily affect minorities.
1. The minimum wage harms the least productive most
What politicians won’t tell you but what ALL economists know is that the people who are most likely to lose their job due to an increase in the minimum wage are the least educated, the ones with the least skills, and the ones that are likely to keep their jobs are the more educated, the ones with the most skills. For example, if you had to lay someone off, with all things being equal would you rather lay off someone with or without a high school diploma? With or without the ability to speak english? With or without a criminal record? Remember, as the minimum wage goes up the market becomes an employers market (supply increases and demand drops) so that employer now has more people to choose from.
So being that minorities are the ones that tend to be less educated either because of a poor public school system, or the lack of english speaking parents at home, it is primarily poor minorities that feel the brunt of the minimum wage – while middle class white students reap most of the rewards.
Free exchange, a blog provided by the Economist magazine, explains it this way:
It seems very likely to me that the small number of people made redundant as a result of a modest minimum wage hike are very likely to be the worst off of the poor: convicted felons, recovering drug addicts, welfare mothers, the cognitively disabled, high school dropouts, those whose backgrounds were too chaotic to impart good work habits. The well-connected, well-socialised middle class teenaged and twenty-something students, on the other hand, seem disproportionately likely to keep their jobs.
In short, the minimum wage is a subsidy to relatively affluent workers at the expense of poor, less educated workers.
2. The minimum wage harms poor areas over rich areas
In addition to harming primarily poor people, the minimum wage harms primarily poor areas. Think of it this way, lets say that you were a person looking to open up a new business and you were looking for communities to open that business in. Well, if you wanted to open up that business in a poor neighborhood you would have alot of things working against you – you would tend to have a lower educated work force, customers with less buying power, and sometimes an area with a high crime rate (higher security risks and costs etc). Well, if you were able to pay whatever you wanted, you could pay your employees lower wages to compensate for some of those disadvantages but a minimum wage takes that option away. So now, especially for those companies that are not extremely profitable, your choices are more limited. You can’t, even if you wanted to, open up in a poor neighborhood because your costs will exceed your profits. So what is that poor community left with? Nothing – with less companies opening up shop there. Have you ever wondered why poor neighborhoods have so many empty lots? Well the minimum wage is a big reason for that…and of course the neighborhoods that benefit are those neighborhoods with more educated citizens, with less crime, and with more disposable income. In short, the minimum wage harms the poor communities to the benefit of the richer communities.
To think of this another way, it is important to note that the minimum wage was first passed at the national level in 1938, around the time of the second wave of the great depression. If you were to look at the voting record of that legislation, one of the things you would discover is that the northern senators voted almost unanimously in favor of the minimum wage and the southern senators voted almost unanimously against the minimum wage. The reason for that is that wages were alot lower in the south, the south being the part of the country with the most ex-slaves. So the minimum wage was basically set at a level above southern wages but below northern wages. The minimum wage was set by the northerners as a way to keep jobs in the north by preventing businesses from moving to the south to take advantage of the lower wages. Who paid for this minimum wage? Unemployment during that time was almost all poor southern workers, primarily black southern workers, who were basically priced out of the labor market (the minimum wage was also used to price women out of the labor market, see here ). In short, the more you raise the minimum wage, the more you harm poor areas at the benefit of rich areas.
Is it a coincidence that the minimum wage is primarily supported by legislators from San Francisco, New Jersey, Massachusetts, and other high cost areas, where the minimum wage is more symbolic than anything else, because wages already have to be high to cover the extremely expensive living costs? I don’t think so.
3. The minimum wage makes discrimination less costly, therefore easier to discriminate
Lets talk about racism and how the minimum wage helps racists. Lets say that I was a racist and I wanted to open up a restaurant but I hated Mexicans so much that I refused to hire any in my shop. My shop is to have whites, and whites only. Well one of the first things I will learn, as any restaurant owner will tell you, is that Mexicans are extremely productive at such a cheap price. To put it another way, it is hard to get any other group of people to work so hard for such little money. Try hiring a bunch of middle class white kids to wash dishes, clean tables, sweep the floor, cook the food, all for close to the minimum wage, it just isn’t going to happen. So okay, I am a stubborn racist and decide to do it anyway – problem is, to get the same quality of workers I have to now pay them more per hour, say $8, or $10/hour. That is the beauty of the market system, I now have to pay for my racism. Whereas the non-racists are getting the same productivity from their works as I am but at a much lower rate, I have to forego precious profits to support my racist beliefs. Furthermore, in a really competitive market this is enough to put me out of business!
Now, factor in the minimum wage and what happens? Well you have just made it easier for me to be racist. Now I may have to pay $8/hour or $10/hour but you know what, so does everyone else, in other words, you have reduced and spread out the costs I previously had to incur to follow my racist beliefs….and the Mexicans that used to work there? Sure, some of them keep their job but some would surely be replaced. Think of it this way, if you were an employer and you had to pay an employee $10/hour no matter what, would you rather have one that spoke english or one that didn’t? One with more education or less? One with a criminal record or one without? In other words, the minimum wage is to the benefit of those who have more skills and makes it less costly to discriminate. For more on this, go here, here, here, and here.
With the accumulation of the above taken into account, it is easy to understand why the harm of the minimum wage falls primarily on poor, low educated, low skilled, minorities, especially blacks.
David Neumark, professor of economics at UC Irvine and Olena Nizalovaof have a NBER study on the long-run effects of the minimum wage, it states ( here ):
Exposure to minimum wages at young ages may lead to longer-run effects. Among the possible adverse longer-run effects are decreased labor market experience and accumulation of tenure, lower current labor supply because of lower wages, and diminished training and skill acquisition. Beneficial longer-run effects could arise if minimum wages increase skill acquisition, or if short-term wage increases are long-lasting. We estimate the longer-run effects of minimum wages by using information on the minimum wage history that workers have faced since potentially entering the labor market. The evidence indicates that even as individuals reach their late 20’s, they work less and earn less the longer they were exposed to a higher minimum wage, especially as a teenager. The adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks. From a policy perspective, these longer-run effects of minimum wages are likely more significant than the contemporaneous effects of minimum wages on youths that are the focus of most research and policy debate.(emphasis added)
The more the minimum wage is lifted, the harder it is for those with less skills, less education, and more barriers to climb (english, racism, etc) to overcome, leading to more and more people being priced out of the labor force, and so it should be no suprise that the minimum wage hits hardest those who are most vulnerable to racism, living in bad areas, and low education.
In addition to all of this, the minimum wage benefits large businesses and harms small businesses, it causes an increase in prices, it increases unemployment and it reduces competition, all in all, things that primarily harm the poor. But hey, it brings in votes, so who cares right?
“Politicians like the minimum wage because the cost of financing it is paid by three groups—the workers (in the form of lower employment), employers (in the form of lower profits) and consumers (in the form of higher prices). Missing from that list is taxpayers—so for politicians, if the negative effects are hidden from most voters, the minimum wage is close to a free lunch. So it is preferred by politicians to the earned income tax credit (EITC) which costs tax dollars. Most (all?) economists argue that the EITC is a much better way to help the poor. The other benefit of the minimum wage for politicians is that it makes low-skilled labor more expensive and boosts the demand for close substitutes, often union workers.” —Russell Roberts, professor of economics at George Mason University
Greg Mankiw, professor of economics at Harvard University, writes on the contradictions of the minimum wage:
Consider this policy aimed to help workers at the bottom of the income distribution:
1. A wage subsidy for unskilled workers, paid for by
2. A tax on employers who hire unskilled workers.
Now, if you think like an economist, you might wonder about the logic of part 2 of this proposal. You might say, “A tax on the hiring of unskilled workers would discourage their employment, offsetting some of the benefits they would get from the wage subsidy. It would be better to finance the wage subsidy with a more general tax, rather than with a tax targeted specifically on employers of unskilled workers.”
I agree. So why did I bring up this proposal? Because a policy essentially the same looks likely to become law, having been advocated by Congressional leaders and, recently at his news conference, President Bush. Haven’t heard of it? It is called an increase in the minimum wage.
The full post can be found here.
“The reason I am a Republican is that, compared to Democrats, the Republicans tend to favor smaller government, lower taxes, and greater reliance on free markets. On many social issues, I find myself agreeing with the Democrats more than the Republicans, and I know that the Republicans are far from perfect on economic issues. (Don’t get me started.) But as a classical liberal in the spirit of Milton Friedman, I find myself rooting for the Republican team more often. The recent debate over the minimum wage is a case in point”. — Greg Mankiw, professor of economics at Harvard University writing in his blog about party affiliation
“It seems very likely to me that the small number of people made redundant as a result of a modest minimum wage hike are very likely to be the worst off of the poor: convicted felons, recovering drug addicts, welfare mothers, the cognitively disabled, high school dropouts, those whose backgrounds were too chaotic to impart good work habits. The well-connected, well-socialised middle class teenaged and twenty-something students, on the other hand, seem disproportionately likely to keep their jobs. There is also the moderately well-supported possibility that high minimum wages encourage short-sighted teenagers to drop out, or reduce their studying,in order to take jobs”.–The Economist on the minimum wage
“A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum wage to a much higher $7.25 per hour from the present $5.15 per hour. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I suspect that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would surmise why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition–I believe all were asked to sign”. —Gary Becker, Nobel Laurette in economics and professor of economics at the University of Chicago writing in the Becker-Posner blog on the minimum-wage
“As a means of raising people from poverty or near poverty, the minimum wage is distinctly inferior to the Earned Income Tax Credit, which compensates for low wages without interfering with the labor market…So why are the Democrats pushing to increase the minimum wage rather than to make EITC more generous? Three reasons can be conjectured. First, unions, which are an important part of the Democratic Party’s coalition, favor the minimum wage because it reduces competition from low-wage workers and thus enhances the unions’ bargaining power and so their appeal to workers. This would not be as serious a problem for unions if minimum-wage workers were organized. But the fact that most minimum-wage workers are part time makes them uninterested in joining unions. Second, increasing the EITC would mean an increase in government spending and hence in pressure to increase taxes, and the Democrats wish to avoid being labeled tax-and-spend liberals. And third, genuinely poor people vote little. The number of nonpoor who would be benefited by an increase in the minimum wage, when combined with the number of nonpoor workers whose incomes will rise as a result of reducing competition from minimum-wage workers, probably exceeds the number of nonpoor who will be laid off as a result of an increase in the minimum wage. Teenagers, moreover, will be among the groups hardest hit, and most of them do not vote”. —Richard Posner, writing on the proposed minimum wage increase, also, see Greg Mankiw who has more here
“The most reliable and effective protection for most workers is provided by the existence of many employers. As we have seen, a person who has only one possible employer has little or no protection. The employers who protect a worker are those who would like to hire him. Their demand for his services makes it in the self-interest of his own employer to pay him the full value of his work. If his own employer doesn’t, someone else may be ready to do so. Competition for his services — that is the worker’s real protection.” —Milton Friedman