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The Minimum Wage

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The standard political reason for wanting to raise the minimum wage is to aid the downtrodden, especially minority groups, by increasing their earnings and hopefully their employment opportunities. However, this move will not help these people; it will in fact only hurt them. Instead of raising their income, the actual effect of the law is to cut off the bottom few rungs of the employment ladder, rendering it harder for low-skilled workers to achieve moderate-paying jobs.

This can be explained quite easily through an example. If the law requires that an employee must be paid no lower than $3.00 per hour, an employer who hires a person with a productivity of $1.50 per hour will suffer considerable losses. The result is unemployment of the low-productivity individual.

Without the legislation, this worker could be employed at $1.25 or $1.50 per hour, rather than unemployed at the artificially high price of $3.00 per hour. In fact, this legislation says in effect that if your productivity is not at the $3.00 per hour level, then you don’t deserve to work. It prevents the individual from learning the skills necessary to enter the higher salary brackets. The government cannot make this person worth a given amount by making it illegal for anyone to offer him less. On the contrary, what happens is that he is deprived of the right to earn what his abilities will allow, and the community is deprived the services that he is capable of rendering.

Ironically, low-productivity workers tend to belong to the minority groups that the law was designed to aid. Their lower ability to produce stems from differences in education, culture, motivational background, breakdown of the family unit, etc. Comparatively, the productivity of young whites is higher than that of the average minority youth. This is unfortunate, but nonetheless true.

Without the minimum wage, the downtrodden have the ability to accept a lower payment, increasing their chances of employment. With it, the effects are obvious: if the law requires that no less than $3.00 be paid for an hour of work and the average productivity of a white youth is $3.00 per hour, while the average productivity of minority youth is $2.50 per hour, then it logically follows that the white, but not the minority, will be hired. This result holds true regardless if the employer is prejudiced or not. If anything, it is the law that is prejudiced, for it penalizes the employer 50 cents per hour if he hires minorities over whites.

The unemployment that ensues, coupled with the relief program designed to financially aid these people, causes an additional problem. If the minimum wage is $3.00 per hour, then the government has forbidden anyone from working a 40-hour week for less than $120. Now, suppose that $70 per week is offered in relief. This means that a worker can no longer be usefully employed at, say $90 per week, but rather is supported in idleness at $70 per week. This doesn’t make any sense. Without the law, the worker would be self-sufficient, the government need not compensate him, and he would earn an extra $20 per week.

Another problem that arises is that the more relief that is offered, the less incentive there is to work. In effect, one works for the difference between potential wages and relief. For example, if the relief is $106 per week, and the offered wage is $110 per week, then in real terms, the individual is being asked to work for only $4.00 per week.

The point is not that there is no way of raising wages; rather, it is that using government fiat as a method to achieve this is entirely counterproductive. The most efficient method would be to raise marginal labor productivity. In other words, go right to the source. This can be done through an increase in capital accumulation — i.e., by an increase in more efficiency of worker or by better education and training. The more a worker can produce, the more he is worth to an employer, and his wages will reflect this. Hence, government policy should be designed to encourage capital accumulation — or at least not to discourage it.

The statistical record proves that the minimum-wage law creates teenage unemployment, especially among minorities. For example, in 1948, when the effective minimum wage rate was much lower, white teenage unemployment was 10.2 percent, while black unemployment was 9.4 percent. Today, white youth unemployment is 13.9 percent, whereas black is 33.4 percent.

With all of this information at his disposal, the question is why would the president consider raising the minimum-wage rate once again? The answer is quite simple — lobbying. This is why government failure is so common on all levels. In this case, it is the labor unions that benefit the most by the effects of an increase in the rate. By eliminating cheaper labor, i.e., the bottom few rungs on the employment ladder, the power of the union is increased. With fewer low-wage competitors, the unions can demand a higher wage. This is precisely what they desire. So not only would the president not be helping the downtrodden with his plan to increase the minimum wage, but he would be knowingly hurting them. Is this any way to help the poor? Is it morally sound?

This essay appeared in the Chalcedon Report , P.O. Box 158, Vallecito, CA 95251. Reprinted by permission.

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    James M. Liebler is an author for The Future of Freedom Foundation. We'll have a more detailed bio for them soon.