Art Carden, Contributor
I'm an economist interested in the ordinary business of life.
In July, the federal minimum wage rose from $6.55 per hour to $7.25 per hour. Before it went into effect, the Shelby County Commission in Tennessee passed an ordinance requiring firms that contract with the county to pay a “living wage.” Similar ordinances are in place around the country.
But these laws actually eliminate opportunities for low-skill workers and waste resources. They also couldn’t have come at a worse time: The last thing people on the margins of the labor market need are laws that will make them more difficult to employ. With unemployment hovering near 10%, perhaps now is a good time to consider repealing the minimum wage.
This is a standard application of basic economic principles. Demand curves slope downward, which means that people wish to buy more of something as it gets cheaper and less of something as it gets more expensive. Supply curves slope upward, meaning people are willing to do more of something as the rewards increase and less of something as the rewards decrease. In competitive markets, minimum wages create unemployment: While they draw more people into the labor market, they reduce the amount of labor companies wish to hire.
In the complex American labor market, these effects may be difficult to identify, but a comprehensive survey research on minimum wages by David Neumark and William Wascher finds that minimum wages do, in fact, reduce employment. As Neumark argues in a Wall Street Journal article, the best estimates suggest that this past summer’s minimum wage increase will likely destroy approximately 300,000 jobs that would otherwise be filled by teenagers and young adults. For example, summer camps cut back on hiring in response to the weakening economy but also in response to the coming increase in the price of labor.
Even if a higher minimum wage doesn’t manifest itself in lost jobs as such, it will lead to fewer hours, reduced benefits or both. Some workers who would have received paid training won’t. Employee discounts and other perks might fall. Some jobs that would have been created in the absence of a higher minimum wage won’t be–self-checkout scanners at grocery stores are in part a response to higher labor costs–and there are many margins on which employers can adjust compensation without necessarily firing people.
There are other ways in which a minimum wage is a raw deal for low-skill workers. One is its effect on experience in the labor market and, therefore, future earnings. Since having a job is one of the most important ways to acquire valuable skills, today’s minimum wage-induced unemployment translates into tomorrow’s reduced earnings.
Under-employment among young black males and low earnings among older black males are perennial problems explained in part by the minimum wage. Minimum wages and other regulations on the labor market lock a lot of younger black males out of the labor market, which means they do not acquire as many skills as they would if they were employed. When they are older, therefore, they earn less. In the 1960s, Milton Friedman said that the minimum wage is a crime against black Americans.
There is some evidence that this is the case in the most recent Employment Situation Summary released by the Bureau of Labor Statistics. The change in the unemployment rate for all workers between July and August was 0.3 percentage points (from 9.4% to 9.7%) while the change in the unemployment rate for “Black or African American” workers was double that–0.6 points (from 14.5% to 15.1%).
For workers classified as “Hispanic or Latino Ethnicity,” there was a 0.7 percentage point increase in the unemployment rate (from 12.3% to 13%). Between August and September, the Hispanic/Latino unemployment rate recovered slightly, while the unemployment rate for black workers increased again, from 15.1% to 15.4%. Workers in these categories might be disproportionately affected by the economic downturn, but they are also disproportionately affected by the minimum wage increase.
Minimum wages also feature a particularly cruel irony. Some proponents of the minimum wage argue that even if employment does fall, it is still a good policy because it might lead to a net increase in employees’ incomes. This appears to be true at first, but the expected gains from the higher minimum wage–plus part of what workers were previously taking home–will evaporate as workers jockey with one another to obtain the resource transfers promised by the minimum wage.
The minimum wage drives a wedge between the marginal value of an hour of labor and its marginal cost. This provides incentives for people to waste resources trying to appropriate the transfer–by paying lobbyists, for instance–or through more innocuous channels, like waiting in line at the employment office. No new value is created, a lot of value is destroyed and the workers we are trying to help are worse off as a result.
But the minimum wage controversy speaks to a larger issue. The market process reveals the marginal value of a given hour of labor, but supporters of minimum wages assume that the impersonal market process is somehow capable of committing injustices. This is a line of thinking that is centuries out of date. In Medieval times, markets were hampered by the “just price” doctrine, which basically held that, in any transaction, there was a morally correct price and other prices that were morally incorrect. There was no compelling theory for why some prices were morally correct and some were not; further, there was nothing to ensure that the mechanism by which these prices were determined was legitimate. In the same way, can we reasonably expect to identify those who are blessed with sufficient moral insight as to be able to determine which wages are “just” and which wages are “unjust”?
Unfortunately, this is a point that has to be made over and over again. No matter how they are packaged, restrictions on how labor markets operate ultimately destroy wealth and hurt poor workers. If Neumark’s estimate is accurate, then as a result of a minimum wage increase, about 300,000 people will be denied the opportunity to acquire the skills they need to succeed later in life.
Art Carden is an assistant professor of economics and business at Rhodes College in Memphis, Tenn., and an adjunct fellow with the Oakland, Calif.-based Independent Institute. He is a regular contributor to Mises.org, Lifehack.org and Division of Labour.
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