Tuesday, September 1, 2009
Last month, in a move that sparked little outrage, the federal government hiked minimum wage to $7.25 an hour. Just as the jobless rate prepares to pierce double digits, our government’s response is to mandate more unemployment.
Many Americans fail to understand the dynamics of minimum wage, seeing it as a protection for low-skilled workers, rather than identifying it as a protection from low-skilled workers. This is a misconception of the type described by Henry Hazlitt in Economics in One Lesson. It is one that results from focusing only on a policy’s direct effect on a specific group, without considering its indirect effects on all groups.
It is easy to understand how an increase to $7.25 an hour benefits current minimum wage workers who provided a production value greater than that amount. But, few consider how that same action drives those with a production value below $7.25 an hour out of the job market altogether.
In a free market, the price of every commodity is determined by factors such as scarcity and demand. Scarce commodities in high demand, such as diamonds, command higher prices than abundant commodities in low demand, like sand. Wages are no different. Skills that require a high level of expertise, such as those of a brain surgeon, are naturally valued more highly than those needed to wash dishes.
Once wages are recognized to be just another price set by the market--that of labor--minimum wage can be properly understood. It is an arbitrary price control which, like all others, serves to restrict consumer choices and grant favor to one group of citizens at the expense of another.
To illustrate the point, pretend a minimum price of wine was enacted, requiring all wine to sell for at least $10 a bottle. Just like minimum wage does not effect what the Yankees pay their third baseman, a minimum wine price would not effect the price of Dom Perignon champagne. The price minimum would only have impact on the lowest grade wines.
Consider the effect of the $10 wine minimum on what is currently a cheap $2 wine, like Thunderbird. Forced to compete with fine corked wines from Napa Valley, Thunderbird would find few takers. The real world effect of such a law would not be to bolster Thunderbird's profits, but rather to mandate Thunderbird’s demise. Minimum wage works exactly the same way.
I was confronted by this dynamic during my career in social work. For a time, I served as job counselor for General Relief (GR), a local government program that provided a last-ditch means of support to those who lacked assets, income or eligibility to state and federal welfare. In order to access GR, able-bodied applicants had to agree to work off their grants at the rate of minimum wage. Failure to do so resulted in a sanction for the upcoming month.
Despite their lack of a disability, most of these GR workers were regarded as unemployable. Those who were not irresponsible, unreliable or addicted, generally lacked the necessary skill and/or education to compete with students and others seeking the same entry level jobs.
Each month, I would discuss the work performance of my client’s with their job site supervisors. What became apparent was that nearly all of these workers demonstrated some level of production value. That is, each of them was able to produce work that would be of some value to some employer.
The problem for GR workers, and others of low skill or poor work history, is the inability to display a recognized value of at least $7.25 an hour to potential employees. In effect, minimum wage mandates their unemployment, since hiring them at fair market value has become a criminal activity.
Quite likely, in a free labor market, small business would be willing to hire the unskilled at a lower wage, as apprentices, then provide the necessary training to increase their production value. However, no matter how much it is in the individual’s benefit to accept such an arraignment, government forbids it. Is not the marketing of one’s own skill a self-ownership right?
For the bottom rung of American workers, minimum wage laws impede the pursuit of happiness by diminishing their prospects for upward mobility. Moreover, imposing price controls on labor damages society at large, by discouraging production and fostering dependence on the public purse.
Minimum wage laws were not spurred to enactment by a coalition of young adults and unskilled labor--those widely believed to be its primary beneficiaries, but who are actually its primary victims. Rather, it was the brainchild of organized labor. Even though few union employees make anywhere near minimum wage, organized labor had its own reasons for being sponsors of it. Fully understanding the dynamics involved, they have used minimum wage for decades as a mechanism to protect their members from the competition of unskilled labor.
Big Labor likes to apply spray deodorant to their motives, arguing that minimum wage is a necessary tool of social justice and that Americans must be paid a “living wage,” despite what they produce.
But what they are really doing is far less noble. In essence, organized labor is using its massive political power to strip self-ownership rights from those struggling most to survive tough economic times, simply to further their own selfish interests.
The very politicians who wallow in Big Labor money are the quickest to blame the rich for the plight of the poor. Yet, it is not the rich who are mandating joblessness for the most vulnerable among us.