The Tragedy of the Minimum Wage

The Tragedy of the Minimum Wage by Peter Burrows 11/3/16 –

Harry Browne, candidate for Grant County Commissioner, District 5, has said that it is a “moral imperative” for Grant County to consider a county-wide minimum wage law, perhaps as high as $15 per hour. Unfortunately, the majority of voters probably agree with him.

The popularity of minimum wage laws does not mean such laws make economic sense.  The economist Walter Williams once wrote that trying to reduce poverty with higher minimum wages was “breathtakingly stupid.”  Dr. Williams occasionally goes a little over the top, but he has a point.  Think about it: Why doesn’t Haiti eliminate that country’s poverty by passing a $15 an-hour minimum wage law?

Advocates of minimum wage laws like to point to studies that “prove” such laws do not reduce employment.  What this means is that the law of supply and demand, which says that demand is an inverse function of price, e.g.. the higher the price the lower the demand, doesn’t apply to labor markets. Another way to look at is that a law of human nature can be nullified by a legislative law.  In other words, GOVERNMENT IS GOD. (See Walter Williams’ quote above.)

Most studies show what common sense would conclude: higher wages equal lower employer demand. The Federal Reserve Bank of San Francisco released a study last December that estimated that a 10% increase in the wage floor would reduce teenager, 16-19, employment by 1% to 3%, and possibly larger than that.

The problems in measuring the real-world effects of minimum wage laws are formidable, with lots of variables.  Nobody in their right mind, though, would deny that at some level higher minimum wages don’t have a negative effect, or claim that higher minimums actually INCREASE employment.  If that were the case, let’s pass a $500 per hour law, or $1,000 per hour, etc. (See Walter Williams’ quote above.)

Probably the biggist problem with most minimum wage studies is that they try to measure short-tem effects when it’s the long-term effects that should concern us.  As noted in the San Francisco study, an existing firm hit with higher minimums may find itself trapped in a business model that is relatively uneconomic compared to a new firm that can adjust to the higher minimum with fewer employees.

I remember for example, and you young’uns out there will NOT believe this, that many years ago when you’d pull in to a gas station two kids would run out and one would fill your tank while the other cleaned your windshield. You’d just sit there. Really.  Along came self-service stations and adios, kids.

In fact, the most dramatic, and tragic, long-term effect of minimum wage laws is seen in teenage unemployment, especially minority teens.   This is a fact that has been known for a long time and is something politicians of both parties should be ashamed of.  The following quote is from a 1973 –1973 — interview of the libertarian economist Mjilton Friedman:

“In the early Fifties, the unemployment rate among teenagers was about the same for blacks as for whites. Both were about eight percent when the overall employment rate was about four percent. —after the minimum wage rate was raised from seventy-five cents to a dollar, the unemployment rate of black teenagers shot up from eight percent to domething like 20 to 25 percent.  For white teenagers, it shot up to something like 13 percent. From that day to this, the rates for both black and white teenagers have been higher than before 1956. When they start to decline, a new rise in the minimum wage rate comes along and pushes them up again. The black teenage rate has been very much higher than the white teenage rate for reasons that highly regrettable and that we ought to be doing something about: Blacks get less schooling and are less skilled than whites. Therefore the minimum wage hits them particularly hard. I’ve often said that the minimum wage rate is the most anti-Negro law on the books.”

Nothing has changed. Black teen unemployment is in the 35-45 percent range, and last night I saw on one of the news shows that a lack of jobs for black kids was a serious inner-city concern.  The political blindness also continues. A couple of years ago the then-Secretary of Education Arne Duncan hosted “an Intenet discussion aimed at uncovering why young black and Hispanic men are ‘less successful’ in the job market —.”

It’s enough to make you weep.

The real moral imperative when considering minimum wage laws is to, at the very least, exempt teenagers.  I would go even farther and exempt all teenager wages from Social Security withholding.  That would be a small price to pay for the education kids would get from having a job. Small indeed.

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