Fortunately or unfortunately, I am starting to read and investigate more and more and am realizing one important truth: things are not always as they seem. Reading textbooks and bumbling around my whole life, I have generally accepted notions about the world around me instead of challenging them on an objective basis. This is partly what I am going to reveal in many of my blog posts. I approach today's topic on the minimum with a reverence because it is a very personal issue when referring to someone's wages or livelihood, but I hope to reveal some truths that many if not all people in our friend groups and in our communities have not even thought about.
The Argument
In a free-market economy, employers must bid competitively for the services of workers. If an employer attempts to pay wages lower than his workers can obtain elsewhere, he will lose his workers and thus be compelled to change policy or go out of business. If an employer pays wages above the market level, the higher costs will put him at a competitive disadvantage in the sale of products or services, and again he will have to change policy or go out of business. Here is an important truth: we must stop looking at employers as greedy or inhumane. Employers do not lower wages because they are cruel, nor raise them because they are kind--not made on a whim.
Since the start of the Industrial Revolution and capitalism, wage rates of steadily risen because of the economic consequence that inevitably comes with rising capital accumulation, technological progress, and expansion, not central planning or mandates by government bureaucrats. The free market allowed for an ever-widening market for labor which increased the demand and competition for worker's services, thus driving wage rates upward. Henry Ford was offering 5 dollars a day wage rates at a time when his competitors were paying 2 or 3 dollars a day, not because he was kind, but it was in his economic self-interest for productivity.
The Consequences
As a result of government intervention into private markets by mandating a minimum wage, employers cannot afford to hire new workers, curtailing production and capital accumulation that is the main driver of economic growth. Thus, one group of workers obtain unjustifiably high wages at the expense of workers who are unable to find jobs at all. Unemployment is a direct result of forcing wage rates above their free-market level.
The Congress passed one of the biggest increases in the minimum wage between 2007 and 2009 from $5.15 to $7.25 and have seen unemployment rise to levels we haven't seen in decades. Most people will argue that that has been the result of the overall unemployment going up, but you cannot deny the percentage gap between the teen unemployment and regular unemployment.
The fact is that the minimum wage is hurting the vary people that it was most intended to help. Instead of letting a low-skilled or uneducated person be employed at a rate to suit the employer like $5 an hour, they government has made that practice illegal and is forcing a business to employ them at $7.25 an hour. The government is effectively denying low-income folks and teens an opportunity to gain experience and some cash flow that could lead to a more stable life and potential opportunities in the future.
The argument is that a family cannot be supported on the minimum wage or anything less, but the facts just do not support this argument. According to the Department of Labor, only 1.1% of Americans who work 40-hour weeks earn the minimum wage. Thus, 99% of full time workers earn more than the minimum wage because teens are 5x as likely to earn minimum wage than adults and are nearly always first-time or part-time jobs. The fact is that these jobs are taken primarily by those who do not have a family to support.
Conclusion
The notion that producers or employers can just "absorb" wage increases and mandates by taking them "out of profits" is a faulty notion. For what does expansion and future production come from than out of the profits of employers. It is economically naive to believe that the effects are not detrimental. At any rate, my man Milton can do a far better job describing this than me. But, I am sure this will spark a heated debate. I look forward to it.
Blake
2 comments:
Yes, Friedman is right, the minimum wage or the wage rate in general should not be set by the government. The free market will always set wage rates at a fair value. Murray N. Rothbard points out in "America's Great Depression" that labor is scares. People want to work because they have to live, and employers want to hire to lighten individual work loads or expand their production. The problem is that labor is such a precious commodity that a lot of times, employers cant afford to hire new employees to either expand their business or lighten individuals work loads. But point of the matter, labor is like any other commodity, it should not be regulated by the government in any way.
"Even more mischievous that Hoover's pro-union attitude was his adoption of the new theory that high wage rates are an important cause of prosperity. The notion grew during the 1920's that America was more prosperous than other countries because her workers had the requisite purchasing power to buy industry's products. While high real wage rates are actually the consequence of greater productivity and capital investment, this theory put the cart before the horse by claiming that high wage rates were the cause of high productivity and living standards"
"Whenever government intervenes in the market, it aggravates rather than settles the problems it has set out to solve. This is a general economic law of government intervention."
Murray Rothbard- "America's Great Depression
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