Minimum wage: good intentions, bad policy

BY JOSE AZEL
jazel@miami.edu

Minimum wage laws are politically sacrosanct; politicians who argue against increasing the minimum wage commit political suicide. Voters believe that minimum wage laws are necessary to ensure that low-skilled workers, especially new entrants, teens and minorities, earn a living wage and are not exploited by greedy capitalists.

Echoing this sentiment, President Obama in his 2013 State of the Address proposed to increase the federal minimum wage to $9 an hour claiming that, “This single step would raise the incomes of millions of working families.” Similarly, a March 27 Miami Herald editorial argued for state legislators to “Stop assault on fair-wage laws.”

These are laudable ideals, but do minimum wage laws produce the desired results?

Our distinction as humans is that we survive, not by sharpness of tooth or claws, but by sharpness of mind, an attribute we do not seem to use when thinking about minimum wage laws. The cruel and unspoken irony is that minimum wage laws do the most harm to the segments of our society that we seek to help — the unskilled poor and the inexperienced youth.

Intuitively we all understand the fundamental principle of economics that when the price of anything increases, the quantity demanded of that good or service will decrease. The wage rate is the price of labor; if the cost of labor is increased via a government command, the quantity of labor demanded will decrease. Simply put, with other things constant, the number of jobs offered will decrease when the minimum wage is artificially increased. The case against minimum wage decrees is pellucid and straightforward: Increasing the cost of job creation will decrease job creation.

Even as I write this, I can hear the angry criticism, but pray tell: How exactly does mandating an increase in the price of labor help the unemployed?

Even worse, the resulting decrease in employment becomes permanent as employers shift to labor-saving production technologies or to outsourcing abroad. True, those who keep their jobs will earn more, but others will lose their jobs or fail to get one when new jobs are not created. Many who live in poverty are unemployed and thus will not benefit from an increase in the minimum wage. In fact, their prospects for employment will diminish.

Let’s be clear: Enacting a higher than market minimum wage law does not result in a higher income for all workers, only for those who retain their jobs. And this increase will be at the expense of those who will become or will remain unemployed.

We know this, and yet minimum wage laws remain popular with public officials and with voters who want to express their compassion for the working poor. A more cynical reason is that advocating for an increase in the minimum wage is a way of making political points without having to account for an increase in government expenditures since the cost is presumably borne by employers. Unlike government, however, employers cannot print money and the increased costs will be passed on to consumers in the from of higher prices, or will be shouldered by those that will not be able to find a job because their skills do not command a wage level dictated by government fiat.

Hysteresis is the dependence of a condition not only on the current environment but also on its past environment; the lagging of an effect behind its cause. When government policy prices low-skilled workers and the inexperienced young out of the job market, skills atrophy, hope fades and, tragically, unemployment becomes a way of life.

Our current persistent unemployment levels among the disadvantaged may very well be the hysteresis or lagging effect of our unreflective support of minimum wage laws. Sixty years ago the unemployment rate of 16-19 years old was less than 8 percent. Today, after many rounds of minimum wage increases, youth unemployment is over 24 percent and close to 40 percent for black teenagers. Are minimum wage laws responsible for creating this new normal?

The proposition that government can diminish poverty by making it more expensive for businesses to hire young and low-skill workers is illogical and, worse, it is dishonest. If government can diminish poverty by enacting a $9 minimum wage as claimed by the president, why stop there? Let’s raise the minimum wage to $90 an hour and eliminate poverty altogether.

This is, of course, nonsense and so are minimum wage laws. We will not get good results from implementing a bad idea. Advocating for a higher minimum wage mandate is equivalent to advocating for higher unemployment.

José Azel is a senior scholar at the Institute for Cuban and Cuban-American Studies, University of Miami and the author of the book, Mañana in Cuba.

Prof. Azel has some good points here, and I would like to add some others.

What's the problem with "minimum wage"? Why should it be regulated by the State? It would be understandable for a very centralized authoritarian regime to do so. Because those having a monopoly of available jobs have too much power to abuse a captive labor force. That is true in totalitarian States such as Cuba or authoritarian pseudocapitalist states such as Viet Nam or China. But minimum wages in those places neither respond nor they reflect the extreme poverty level of the workers they are allegedly "protecting". For example, the minimum wage in Cuba is 225 Cuban pesos or some US$10 per month, certainly not enough to survive.

On the other hand, democratic countries such as the United States or many others in Europe, establish high minimum wages "to protect their respective labor forces" (US Federal minimum wage is above US$1.400 per month). But why? Are their labor forces captive? Have those workers no alternative if their salaries are below the survival level?

In the United States and Europe some sectors of the labor force are abused only because illegal immigration turns most migrants into defenseless workers at the mercy of their predatory employers. But such abuse is not to be solved with minimum wages.

In many parts of Europe, where there is a high rate of unemployment, minimum wages are supposed to protect workers because the surplus of labor supply would otherwise allow employers to pay miserable salaries. Such measures benefit the most unskilled sector of those who are actually employed. But it seriously harms the opportunities of the unemployed, who face worse survival perspectives by remaining unemployed.

In addition, whatever relatively high minimum wages are established by the State in a democratic society, the level of illegality in hiring non-resident aliens -or even legal residents- proportionally increases and the abuse is then even worse because it takes place outside the law. In those places where the law is strictly applied to penalize employers paying miserable wages under the table, many small businesses are forced to close in the face of high and ever increasing minimum wages while larger enterprises simply reduce their labor force to keep a reasonable profit level, in both cases creating more unemployment. The other consequence of these labor market reactions is higher prices and reduced production.

Minimum wages are required only to draw a line of illegality in cases of blatant abuses. But they should be flexible and should not be linked to a poverty line equation. The real poverty line is at the level of those unemployed, who have no valid equation when lacking a proper salary or a basic income to survive. Therefore, the minimum wage should move up or down according to the realities of unemployment. The higher the unemployment rate affecting any country, the lower the minimum wage should be until full employment (measured at no more than 5% unemployement) is achieved.

[ See further analysis HERE ]