Hello, everyone! Today I would like to focus on a subject matter that has caught my interest as of late and could very well concern your chances of employment: minimum wage. Since 1938, when the minimum wage first took form, the debate on minimum wage has been a heated one, especially among economists. There is a general consensus among economists, conservative and liberal, that minimum wage contributes to unemployment. The question at hand, however, is if the net gains of minimum wage prevail over its net losses. In this note, I will not focus on the magnitude of its effects as much as I will on net losses vs. net gains. Currently, our national minimum wage stands at about $7.25 per hour and proponents are calling for an increase in efforts to help impoverished workers. Overall, forcing wage controls on businesses in the market will harm businesses (by increasing wage expenses) and the employee, whom the proponents of minimum wage tries to protect.

Independence Institute senior fellow and economics professor Linda Gorman puts into perspective how minimum wages cause economic hardship for the workers it means to help:

The reason is simple: although minimum wage laws can set wages, they cannot guarantee jobs. In practice they often price low-skilled workers out of the labor market. Employers typically are not willing to pay a worker more than the value of the additional product that he produces. This means that an unskilled youth who produces $4.00 worth of goods in an hour will have a very difficult time finding a job if he must, by law, be paid $5.15 an hour.

This goes into my first basic point of the damages of minimum wage: it hurts employment. Basically, when businesses are forced to pay a minimum wage to workers, it must pay out of its own operating funds. Policymakers often forget that wage payments are still an expense on businesses; therefore business owners decide to prioritize their higher-skilled labor and cut out its lower-skilled labor in efforts to save money. Ultimately, as minimum wage stands at $7.25 today, workers that produce no outputs  equal to or greater than their minimum hourly pay are cut out of the work force. This hurts the workers in more ways beyond the employment: they remain low-skilled, hurting their work opportunities elsewhere; and work output is decreased (a side effect that hurts businesses, too). Another scary fact to consider is that Gorman, among many other economists (from economic think-tanks such as the OECD) projected, at the time when minimum wage was $5.15 per hour, that a 10% (or ~$0.51) wage increase would stand to increase unemployment by 1%-2%. Today the minimum wage stands at $7.25 per hour, with an unemployment rate of approximately 9%.

To supplement my evidence of minimum wage effects on employment, I will turn to a case study: the Great Depression. President Franklin Roosevelt laid out an economic plan that called for a demand of workers’ wages being increased 25% nationwide. FDR’s general belief that reductions in prices and workers’ wages led to the Great Depression and believed that artificial wage controls, among other things, could avert that.

UCLA’s Meg Sullivan, however, puts forth research and insight against this plan. She points out that 3 years after the implementation of FDR’s economic plan, “wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.” From the case study of the 11 key industries subjected to FDR’s policies, it has been made even more clear of the apparent inverse relationship of wage rates and employment. Mind you, this isn’t the straw that broke the camel’s back so to speak, given that plenty of other factors of government intervention played a role; however, the artificial wage controls played a significant role and contributed to the maintained double-digit unemployment average of ~16%-17%.

The next and last major point of the damages of minimum wage laws: it hurts business productivity in the market. As mentioned earlier, wage payments to workers is still an expense on the businesses that pay them. If governments try to set a minimal ceiling in which wages must be paid, it forces businesses to allocate those funds into wages that could have otherwise provided wages to low-skilled workers or other business investments, which leads to reduced economic output and productivity. Furthermore, businesses see net losses because they cannot offset the increases in the costs of production onto prices of consumer goods and services. Matthew Kibbe says the following of this situation:

Many firms, however, may be unable to pass on their increased costs to consumers. It is consumers who ultimately determine the price of any good on the market, and they may decide that a business’s product is not worth a higher price.

Market competition makes it harder for businesses to raise prices, especially if consumers feels that the good is not worth the price. Since businesses must meet the needs of consumers in order to make profits, they will have to tailor prices to satisfy customer preferences. Either way, businesses suffer net losses that exceed their net gains.

As I close this article, it can be concluded that minimum wage controls on businesses produces more losses than gains. Low-skilled workers that were meant to benefit from the wage controls are priced out of the market and made just as poor as before since they perform below the minimum wage. Furthermore, economic productivity and outputs decrease as a result, which hurts business growth and consumers who would have purchased their goods at a better, competitive price. Overall, employment and economic output is decreased. Economist Henry Hazlitt says it best when he puts into perspective of how the market typically handles, or would handle, wages when it is freer:

The more the individual worker produces, the more he increases the wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to employers, the more he will be paid. Real wages come out of production, not out of government decrees.

-Nathan

Sources: http://www.econlib.org/library/Enc/MinimumWages.html#abouttheauthor
http://www.cato.org/pubs/pas/pa106.html
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx
http://www.hyperhistory.com/online_n2/connections_n2/great_depression.html
http://www.bls.gov/cps/prev_yrs.htm

Advertisements