Minimum wage laws make it illegal to pay less than the government-specified price for labor.
By the simplest and most basic economics, a price artificially raised tends to cause more
to be supplied and less to be demanded than when prices are left to be determined by supply and
demand in a free market. The result is a surplus, whether the price that is set artificially high
is that of farm produce or labor. Making it illegal to pay less than a
given amount does not make a worker’s productivity worth that amount—and,
if it is not, that worker is unlikely to be employed. Yet minimum wage laws are almost always
discussed politically in terms of the benefits they confer on workers receiving those wages.
Unfortunately, the real minimum wage is always zero, regardless of the laws,
and that is the wage that many workers receive in the wake of the creation or escalation of
a government-mandated minimum wage, because they either lose their jobs or fail to find
jobs when they enter the labor force. The logic is plain and an examination of the empirical
evidence from various countries around the world tends to back up that logic, as we shall see.
Unemployment Because the government does not hire surplus labor
the way it buys surplus agricultural output, a labor surplus takes the form of unemployment,
which tends to be higher under minimum wage laws than in a free market.
Unemployed workers are not surplus in the sense of being useless or in the sense that
there is no work around that needs doing. Most of these workers are perfectly capable
of producing goods and services, even if not to the same extent as more skilled or more
experienced workers. The unemployed are made idle by wage rates artificially set
above the level of their productivity. Those who are idled in their youth
are of course delayed in acquiring the job skills and experience which could
make them more productive—and therefore higher earners—later on. That is, they not only lose
the low pay that they could have earned in an entry-level job, they lose the higher pay that
they could have moved on to and begun earning after gaining experience in entry-level jobs.
Younger workers are disproportionately represented among people with low rates of pay.
Only about two percent of American workers over the age of 24 earn the minimum wage. Although
most modern industrial societies have minimum wage laws, not all do. Switzerland and Hong Kong have
been among the exceptions—and both have had very low unemployment rates. In 2003, The Economist
magazine reported: “Switzerland’s unemployment neared a five-year high of 3.9% in February.”
Back in 1991, when Hong Kong was still a British colony, its unemployment rate was below 2 percent.
Although Hong Kong still did not have a minimum wage law at the end of the twentieth century,
in 1997 new amendments to its labor law under China’s rule mandated many new benefits for
workers, to be paid for by their employers. This imposed increase in labor costs was followed,
predictably, by a higher unemployment rate that reached 7.3 percent in 2002—not
high by European standards but a multiple of what it had been for years.
In 2003, Hong Kong’s unemployment rate hit a new high—8.3 percent. Higher costs for
a given quantity and quality of labor tend to produce less employment, just as higher prices
for other things tend to produce fewer sales. Moreover, higher costs in the form of mandated
benefits have the same economic effect as higher costs in the form of minimum wage laws. The
explicit minimum wage rate understates the labor costs imposed by European governments, which also
mandate various employer contributions to pension plans and health benefits, among other things.
Europe’s unemployment rates shot up when such government-mandated benefits to be paid for
by employers grew sharply during the 1980s and 1990s. In Germany, such benefits accounted for
half of the average labor cost per hour. By comparison, such benefits accounted for less
than one-fourth the average labor costs per hour in Japan and the United States.
Average hourly compensation of manufacturing employees in the European Union countries in
general is higher than in the United States or Japan. So is unemployment. Comparisons of Canada
with the United States show similar patterns. Over a five-year period, Canadian provinces had
minimum wage rates that were a higher percentage of output per capita than in American states,
and unemployment rates were correspondingly higher in Canada, as was the average duration
of unemployment, while the Canadian rate of job creation lagged behind that in the United States.
Over this five-year period, three Canadian provinces had unemployment rates in excess
of 10 percent, with a high of 16.9 percent in Newfoundland, but none of the 50 American
states averaged unemployment rates in double digits over that same five-year period.
A belated recognition of the connection between minimum wage laws and unemployment by government
officials has caused some countries to allow their real minimum wage levels to be eroded
by inflation, avoiding the political risks of trying to repeal these laws explicitly,
when so many voters think of such laws as being beneficial to workers.
These laws are in fact beneficial to those workers who continue to be employed—those who are on the
inside looking out, but at the expense of the unemployed who are on the outside looking in.
Labor unions also benefit from minimum wage laws, and are among the strongest proponents of such
laws, even though their own members typically make much more than the minimum wage rate.
There is a reason for this. Just as most goods and services can be produced with either much
labor and little capital or vice versa, so can most things be produced using varying
proportions of low-skilled labor and high-skilled labor, depending on their relative costs. Thus
experienced unionized workers are competing for employment against younger, inexperienced,
and less skilled workers, whose pay is likely to be at or near the minimum wage.
The higher the minimum wage goes, the more the unskilled and inexperienced workers are likely
to be displaced by more experienced and higher skilled unionized workers.
Just as businesses seek to have government impose tariffs on imported goods that compete with their
products, so labor unions use minimum wage laws as tariffs to force up the price of non-union labor
that competes with their members for jobs. Among two million Americans earning no more
than the minimum wage in the early twenty-first century,
just over half were from 16 to 24 years of age—and 62 percent of them worked part time. Yet political
campaigns to increase the minimum wage often talk in terms of providing “a living wage” sufficient
to support a family of four—such families as most minimum wage workers do not have and would be
ill-advised to have before they reach the point where they can feed and clothe their children.
The average family income of a minimum wage worker is more than $44,000 a year—far more
than can be earned by someone working at minimum wages. But 42 percent of minimum-wage workers live
with parents or some other relative. Only 15 percent of minimum-wage workers are supporting
themselves and a dependent, the kind of person envisioned by those who advocate a “living wage.”
Nevertheless, a number of American cities have passed “living wage” laws, which are essentially
local minimum wage laws specifying a higher wage rate than the national minimum wage law.
Their effects have been similar to the effects of national minimum wage laws in the United States
and other countries—that is, the poorest people have been the ones who have most often lost jobs.
The huge financial, political, emotional, and ideological investment of various groups in
issues revolving around minimum wage laws means that dispassionate analysis is not always the
norm. Moreover, the statistical complexities of separating out the effects of minimum wage rates
on employment from all the other ever-changing variables which also affect employment
mean that honest differences of opinion are possible.
However, when all is said and done, most empirical studies indicate that minimum
wage laws reduce employment in general, and especially the employment of younger,
less skilled, and minority workers. A majority of professional economists surveyed in Britain,
Germany, Canada, Switzerland, and the United States agreed that minimum wage laws increase
unemployment among low-skilled workers. Economists in France and Austria did not.
However, the majority among Canadian economists was 85 percent and among American economists was
90 percent. Dozens of studies of the effects of minimum wages in the United States and dozens more
studies of the effects of minimum wages in various countries in Europe, Latin America, the Caribbean,
Indonesia, Canada, Australia, and New Zealand were reviewed in 2006 by two economists at
the National Bureau of Economic Research. They concluded that, despite the various
approaches and methods used in these studies, this literature as a whole was one “largely solidifying
the conventional view that minimum wages reduce employment among low-skilled workers.”
Those officially responsible for administering minimum wage laws, such as the U. S. Department
of Labor and various local agencies, prefer to claim that these laws do not create unemployment.
So do labor unions, which have a vested interest in such laws as protection for their own members’
jobs. In South Africa, for example, The Economist reported: The main union body, the Congress
of South African Trade Unions (Cosatu) says joblessness has nothing to do with labour laws.
The problem, it says, is that businesses are not trying hard enough to create jobs.
In Britain, the Low Pay Commission, which sets the minimum wage, has likewise resisted the idea
that the wages it set were responsible for an unemployment rate of 17.3 percent among
workers under the age of 25, at a time when the overall unemployment rate was 7.6 percent.
Even though most studies show that unemployment tends to increase as minimum wages are imposed
or increased, those few studies that seem to indicate otherwise have been hailed in
some quarters as having “refuted” this “myth.” However, one common problem with some research
on the employment effects of minimum wage laws is that surveys of employers before
and after a minimum wage increase can survey only those particular businesses which survived
in both periods. Given the high rates of business failures in many industries, the results for the
surviving businesses may be completely different from the results for the industry as a whole.
Using such research methods, you could interview people who have played Russian roulette
and “prove” from their experiences that it is a harmless activity, since those for whom it
was not harmless are unlikely to be around to be interviewed. Thus you would have “refuted”
the “myth” that Russian roulette is dangerous. Even an activist organization that has been
promoting “living wage” laws, the Association of Community Organizations for Reform Now
(ACORN), sought to get its own employees exempted from minimum wage laws.
Its argument: “The more that Acorn must pay each individual outreach worker—either because
of minimum wage or overtime requirements—the fewer outreach workers it will be able to hire.”
It would be comforting to believe that the government can simply decree higher
pay for low-wage workers, without having to worry about unfortunate repercussions,
but the preponderance of evidence indicates that labor is not exempt from the basic economic
principle that artificially high prices cause surpluses. In the case of surplus human beings,
that can be a special tragedy when they are already from low-income,
unskilled, or minority backgrounds and urgently need to get on the job ladder,
if they are ever to move up the ladder by acquiring experience and skills.
Conceivably, the income benefits to those low-wage workers who keep their jobs could
outweigh the losses to those who lose their jobs, producing a net benefit to low-income
individuals and families as a whole—at least in the short run, ignoring the long-run
consequences of a failure of many low-skilled people to acquire job experience and skills,
which could be a larger economic loss in the long run than the loss of pay in an entry-level job.
But to say that there might conceivably be benefits to low-income people
does not mean that this will in fact happen. A study of the effects of minimum wages in Brazil
explored this possibility: The purpose of this study is to examine whether the minimum
wage in Brazil has beneficial effects on the distribution of family incomes, in particular
raising incomes of low-income families. While such distributional effects are the
most common rationale for minimum wages, economic theory makes no prediction that they will occur.
Minimum wages are predicted to reduce employment, and research for both Brazil and the United States
tends to confirm this prediction. But all this implies is that minimum wages will
harm some workers while benefiting others. The distributional effects depend on the magnitudes of
the gains and losses, and where they occur in the income distribution—a purely empirical question.
Research for the United States finds no gains to low-income families from minimum wage increases,
and if anything increases in poverty.... Overall, then,
we do not regard the evidence as lending support to the view that minimum wages in Brazil
have beneficial distributional effects from the perspective of low-income families.
Unemployment varies not only in its quantity as of a given time, it varies also in how
long workers remain unemployed. Like the unemployment rate, the duration of unemployment
varies considerably from country to country. Countries which drive up labor costs with
either high minimum wages or generous employee benefits imposed on employers by law, or both,
tend to have longer-lasting unemployment, as well as higher rates of unemployment.
In Germany, for example, there is no minimum wage law but government-imposed mandates on employers,
job security laws, and strong labor unions artificially raise labor costs anyway.
Unemployment in Germany lasts 12 months or longer for more than half the unemployed,
while in the United States only about 10 percent of the unemployed stay unemployed that long.