Wednesday, November 08, 2006

Minimum wage laws: social justice for the poor—or feel-good legislation for politicians?

On November 7, the state of Colorado voted to increase the minimum wage. While those who voted in favor of the increase were no doubt motivated by compassion for “the least of these,” they may be surprised at the affect minimum-wage laws have on the needy. For an interesting perspective on this subject, I encourage you to read the following article by Thomas Sowell, also available online.

A Glimmer of Hope

August 07, 2006

It was a common political move when Chicago's city council voted recently to impose a $10 an hour minimum wage on big-box retailers. There is nothing that politicians like better than handing out benefits to be paid for by someone else.

What was uncommon was the reaction. Chicago's Mayor Richard M. Daley denounced the bill as "redlining," since it would have the net effect of keeping much-needed stores and jobs out of black neighborhoods. Both Chicago newspapers also denounced the bill.

The crowning touch came when Andrew Young, former civil rights leader and former mayor of Atlanta, went to Chicago to criticize local black leaders who supported this bill.

While the $10 an hour minimum wage was politics as usual, the
unusual backlash against it provides at least a glimmer of hope that more
people are beginning to consider the economic consequences of such feel-good

A survey has shown that 85 percent of the economists in Canada
and 90 percent of the economists in the United States say that minimum wage
laws reduce employment. But you don't need a Ph.D. in economics to know that jacking up prices leads fewer people to buy. Those people include employers, who hire less labor when labor is made artificially more expensive.

It happens in France, it happens in South Africa, it happens in
New Zealand. How surprised should we be when it happens in Chicago?

The economic consequence of political largess--whether in the
form of minimum wage laws or medical or other benefits mandated to be paid
for by employers--is to make labor artificially more expensive.

Countries with generous employee benefits mandated by law--
Germany and France, for example--have chronically higher unemployment
rates than unemployment rates in the United States, where jobs are created
at a far higher rate than in Europe.

There is no free lunch. Higher labor costs mean fewer jobs.

Since all workers do not have the same skill or experience, minimum wage laws have more impact on some than on others. Young, inexperienced and unskilled workers are especially likely to find it harder to get a job when wage rates have been set higher than the value of their productivity.

In France, where the national unemployment rate is 10 percent,
the unemployment rate among workers less than 26 years old is 23 percent.
Among young people from the Muslim minority, the unemployment rate is even higher.

In the United States, the group hardest hit by minimum wage laws are black male teenagers. Those who refuse to admit that the minimum wage is
the reason for high unemployment rates among young blacks blame racism, lack
of education and whatever else occurs to them.

The hard facts say otherwise. Back in the 1940s, there was no less racism than today and black teenagers had no more education than today, but their unemployment rate was a fraction of what it is now--and was no different from that of white teenagers.

What was different back then? Although there was a minimum wage law on the books, the inflation of that era had raised wage rates well above the specified minimum, which had remained unchanged for years.

For all practical purposes, there was no minimum wage law. Only after the minimum wage began to be raised, beginning in 1950, and escalating repeatedly in the years thereafter, did black teenage unemployment skyrocket.

Most studies show unemployment resulting from minimum wages. But a few studies that reach different conclusions are hailed as having "refuted" the "myth" that minimum wages cause unemployment.

Some of these latter studies involve surveying employers before and after a minimum wage increase. But you can only survey employers who are still in business. By surveying people who played Russian roulette and are still around, you could "refute" the "myth" that Russian roulette is dangerous.

Minimum wage laws play Russian roulette with people who need jobs and the work experience that will enable them to rise to higher pay levels. There is now a glimmer of hope that more people are beginning to understand this, despite political demagoguery.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, California.



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