12/04/2013

Why Minimum Wage Hikes Increase Unemployment

There is no clearer demonstration of the differences in the two major political parties than their position on the minimum wage. Democrats generally are in favor of a higher minimum wage, Republican generally oppose it, although in recent times they have certainly caved.

In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law does not provide any jobs; it only outlaws them; and outlawed jobs are the inevitable result.

All demand curves are falling, and the demand for hiring labor is no exception. So laws that prohibit employment at any wage that is relevant to the market must result in outlawing employment and causing unemployment.

If the minimum wage is, in short, raised from $7.25 to $9.00 an hour, the consequence is to disemploy, permanently, those who would have been hired at rates in between these two rates. Since the demand curve for any kind of labor is set by the perceived marginal productivity of that labor, this means that the people who will be disemployed and devastated by this prohibition will be precisely the "marginal" (lowest wage) workers, e.g. blacks and teenagers, the very workers whom the advocates of the minimum wage, such as president Obama, are claiming to foster and protect!

The advocates of the minimum wage and its periodic boosting reply that all this is scare talk and that minimum wage rates do not and never have caused any unemployment. Okay, if the minimum wage is such a wonderful anti-poverty measure, and can have no unemployment-raising effects, why are you helping the working poor by such piddling amounts? Why stop at $9.00 an hour? Why not $20 an hour? $100? $1,000?

It is obvious that the minimum wage advocates do not pursue their own logic, because if they push it to such heights, virtually the entire labor force will be disemployed. In short, you can have as much unemployment as you want, simply by pushing the legally minimum wage high enough.

The fact is that they have always been shrewd enough to stop their minimum wage demands at the point where only marginal workers are affected, and where there is no danger of disemploying, for example, white adult male workers with union seniority. When we see that the most ardent advocates of the minimum wage law have been the AFL-CIO, and that the concrete effect of the minimum wage laws has been to cripple the low-wage competition of the marginal workers as against higher-wage workers with union seniority, the true motivation of the agitation for the minimum wage becomes apparent.

This is only one of a large number of cases where a seemingly defective persistence in economic fallacy only serves as a mask for special privilege at the expense of those who are supposedly to be "helped."

Once in a while, AFL-CIO economists and other knowledgeable liberals will drop their mask of economic fallacy and candidly admit that their actions will cause unemployment; they then proceed to justify themselves by claiming that it is more "dignified" for a worker to be on welfare than to work at a low wage. This of course, is the doctrine of many people on welfare themselves. It is truly a strange concept of "dignity" that has been fostered by the interlocking minimum wage-welfare system.

Unfortunately, this system does not give those numerous workers who still prefer to be producers rather than parasites the privilege of making their own free choice. Minimum wage laws guarantee more unemployment. Period.

sources: Murray Rothbard, Thomas Sowell, studies