Monday, June 05, 2006

Disregard the Status Quo: Minimum Wage Laws are Bad

Minimum wage laws are supposed to help the poor individuals and families who without minimum wage legislation would be severely underpaid. This logic is a fallacy of thought, because the minimum wage actually hurts the poor far more than it helps. Special interest groups (labor unions), much as is the case with public housing, have successfully been able to pressure the government into putting into legislation laws that explicitly hurt the people they claim to be helping.

Proponents of minimum wage believe that low wages are a sign of poverty, and that by introducing a minimum wage, poverty can be reduced. Isn’t poverty diminished if people are paid more? Not exactly. A minimum wage artificially raises wage rates to a level that is above their market value. Employers attempt to purchase the specific skills they need at the lowest available price, while individuals selling their labor attempt to find the highest-bidding employer. Thus the market value of wages, as well as prices, is determined entirely by the market – a simple concept of supply and demand. When the government sets wages through coerciveness (i.e. minimum wage legislation), however, the demand for labor will fall, and will result in unemployment.

Take, for example, an employer who would without a minimum wage set by government pay his lowest paid employee $5.50 an hour. If a law is passed dictating that the employer must now pay all his employees no less than $6.15 an hour, he will now hire less workers than he would before, as an individual will not be hired at $6.15 an hour if he is unlikely to produce at least that much value for the employer. Thus, a minimum wage creates unemployment, especially among the lowest paid and lowest skilled workers. The problem is, these are the individuals who are in most need of employment, and the very individuals that a minimum wage is supposed to help.

So what about those who are actually struggling to live on the bottom rung of the economic ladder? Is the government helping them by arbitrarily establishing the minimum living wage? To put it concisely, the answer is no. The government cannot create wealth by setting a minimum wage; it can only redistribute the existing wealth. So while for those who are already employed and skilled a distinct advantage is given, those who are the least employable are greatly hurt by the redistribution of wealth that results from a minimum wage. Minimum-wage legislation fosters economic inequalities by creating a gap in the economic ladder: those on the bottom rung are kicked off, but those on higher rungs climb up. By no means are such government-created inequalities fair or just.

It is the unskilled and inexperienced workers who are hurt the most by minimum legislation, so it follows logically that teenagers are the potential workers who are hurt the most. The unemployment rate for teenagers searching for a job is over 16%, while national unemployment is around 5%. Furthermore, the black teenager unemployment rate is a whopping 33.1%, 6 times higher than the national average. Why the discrepancy between black teens and white teens? It is due to the intrinsic link between a minimum wage and racism.

Say, for example, an employer is racist, and prefers to hire whites instead of blacks. And for simplicity, suppose that the employees from which he chooses are identical in terms of productivity. If there is a law, such as the minimum wage law, that requires that employers pay the same wage no matter who is hired, the employer is able to effectively discriminate against certain individuals at no cost to himself. This is because, if we assume the minimum wage is $6.15 an hour, the employer will be paying $6.15 an hour to the employee, no matter what his skin color. Without a minimum wage, the black could be hired for less, which although still discriminatory, is better than not being hired at all.

Proponents of a minimum wage argue that they are intended to help adults trying to support a family. What they neglect to realize, however, is that over 76% of minimum wage earners are not heads of households, and only 2.2% of working adults earn the minimum wage. So in actuality, a minimum wage is not helping most adults trying to support a family, and is at the same time considerably raising unemployment.

The job loss that results from a minimum wage is evident. According to a 1981 study, the 46 percent rise in the minimum wage between 1977 and 1981 destroyed 644,000 jobs among teenagers alone. Yet the government has continued to raise the minimum wage since then, because of lobbying from labor unions. Matthew B. Kibbe of the Cato Institute writes,

“Labor unions and their members are the most obvious beneficiaries of government-imposed minimum wages. As the established elite of the workforce, union members are on the receiving end of the minimum wage's redistribution process. To fully understand how unions gain from minimum-wage legislation, one must consider the essential nature of unions.”

So the government, bowing to the demands of labor unions, has disrupted the efficiency and equilibrium of the economy, and tremendously hurt unskilled workers who are made unemployed by the minimum wage.

Furthermore, the minimum wage, while preventing many from getting a job, also lessens the incentive for many workers to become more skilled, and prevents those who became unemployed from getting the experience they need to receive higher wages in the future. Obviously, this is not beneficial to the economy, and essentially allows a few to benefit at the expense of many.

The minimum wage should not be accepted solely because it is the status quo, and has been in operation for an extended period of time. The effect of powerful special interest groups on the government is profound, and in the case of minimum wage legislation, the economy, and the people, are hurt as a result.

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