U.S. youth unemployment now stands at 16 percent for 16–24 year olds, 23 percent for teens, and a shocking 40 percent for black teens. More than 10 million young people are either unemployed or underemployed. Would increasing the federal minimum wage from $7.25 per hour to $10.10 over the next three years, and then indexing it for inflation, improve the job outlook and brighten the future for younger workers?
Proponents of the Fair Minimum Wage Act of 2013 argue that increasing the federal minimum would put more money into the hands of low-skilled workers, stimulate consumption, and create jobs. They contend that if the federal minimum wage had kept pace with inflation since 1968, the nominal minimum wage would now be nearly $11 per hour. Thus, it is only fair for Congress to raise the minimum, helping both workers and the overall economy.
In marking the fourth anniversary of the last increase in the federal minimum wage, on July 24, 2009, a number of business owners and executives associated with Business for a Fair Minimum Wage are showing their support for another increase. In a media advisory released on July 19, several members expressed the belief that “a fair minimum wage makes good business sense.”
Jon Cooper, who owns Spectronics Corporation, makes the following case for the minimum wage increase: “As owner of a manufacturing company with 150 employees, I know increasing the minimum wage is good for business. More than 70 percent of our nation’s economy is driven by consumer spending and increasing the minimum wage will allow low-wage workers to buy food, clothing and other essentials, putting money right back into local businesses.” This same argument was repeated by other business owners and executives.
As Holly Skar, director of Business for a Fair Minimum Wage, stated: “Remember that workers are also consumers, and the minimum wage sets the floor under worker paychecks…. We can’t build a strong economy with wages worth less than they were half a century ago.”
Many of those interviewed said they already paid their workers more than the federal minimum wage; thus, they were expressing their sentiments that other firms should join the cause and support a higher minimum. Good intentions, however, are not a firm foundation for good policy.
Firms that are already paying more than the federal minimum wage do so because their workers are producing more than $7.25 per hour. Moreover, if workers produce at least $12 per hour, then an increase in the minimum to $10.10 would not affect their job status—but the higher minimum wage rate could drive smaller rivals out of business or prevent new firms from entering. Hence, one should be skeptical of businesses that favor raising the minimum wage.
Workers with more education and higher skills, and who are combined with better technology and more capital, will be more productive than teens or younger workers with less education and fewer skills. High wage rates are the result of high productivity, not the cause. Economic growth is not the result of high wages or the minimum wage; it is caused by factors that increase productivity—and that expand economic freedom so that people are free to choose and to utilize their knowledge and skills.
The minimum wage is unfair to low-skilled workers with little experience because it prices them out of the labor market and prevents them from achieving the upward mobility that is the hallmark of a dynamic free-market economy. If the Fair Minimum Wage Act is passed, workers who cannot produce at least $10.10 per hour will not be able to find an entry-level job. When employers expect the wage rate to increase by 40 percent over three years, they will take action today to substitute labor-saving methods of production for the higher-priced labor. Job growth for younger, less-skilled workers will slow, benefits will be cut, and part-time workers will take the place of full-time workers. Those adjustments will speed up if overall business conditions are expected to be weak.
The minimum wage violates the principle of freedom because workers are not permitted to work at less than the politically determined wage rate, even if they are willing to do so to get or retain a job—and employers are prohibited from hiring them. The minimum wage does nothing to increase the productivity of low-skilled workers. Indeed, it prevents them from acquiring the skills and experience they need to move up the income ladder. Discouraged workers may then drop out of the workforce and end up on welfare or drugs.
The self-esteem that comes from work and responsibility is an important aspect of growing up and taking part in the American dream. When government prevents workers from competing for jobs and prevents employers from hiring them at mutually agreed upon wage rates, politics trumps freedom—coercion trumps consent. Wealth creation is reduced and entrepreneurship stifled.
Comparing the minimum wage in 1968 with today’s minimum is wrong-headed. What matters is the relation between today’s nominal minimum wage and the market wage rate for low-skilled workers. As long as the nominal minimum wage rate exceeds the prevailing market wage for a specific category of labor—in this case primarily low-skilled teen workers, especially blacks—there will be adverse effects. And those effects will be greater in the long run than in the short run as businesses adjust by moving to labor-saving methods of production.
Confusing the wage rate (the relative price of labor) with labor income (the wage rate times hours worked) is a common mistake of those who favor a higher minimum wage. If the hourly wage rate for low-skilled workers, determined by market demand and supply, is $6 and the government imposes a minimum wage of $10, workers who lose their jobs will have a zero income. Moreover, entrepreneurs who would have started businesses will not enter the market and other businesses may fail.
Consumption depends on production. If workers get jobs and produce goods and services, they can earn higher real wage rates over time and consume more. But if they can’t find jobs at the above-market minimum wage rate, the wealth-creation process is halted. Employers may charge higher prices to cover the higher minimum wage, but then consumers suffer a loss. Meanwhile, if prices can’t be increased, then profits will fall below normal and capital owners will suffer. There is no net gain in the wealth of a nation from increasing the minimum wage; but there is a loss of freedom as the range of choices open to workers and employers is reduced.
Proponents of the minimum wage, such as Business for a Fair Minimum Wage, neglect the negative aspects of the minimum wage and pretend the law of demand is not binding in the labor market. (For a summary of the empirical arguments, see “The Minimum Wage Delusion, and the Death of Common Sense,” Forbes.com, May 7, 2013). They also tend to misrepresent arguments made against the minimum wage. For example, Robert Atkinson and Michael Lind, writing for Salon.com (“Econ 101 is Killing America, July 8, 2013), assert that in making the case for abolishing the minimum wage, I hold that “low wages are good for the economy.” They trace this idea to “Econ 101,” which they argue teaches that “high wages are bad for an economy and low wages are a blessing.” What they fail to understand is that high wage rates are the result of high productivity and economic freedom. In contrast, countries with onerous government regulations, high taxes, and little economic and personal freedom suffer from low labor productivity and low economic growth; that is why wage rates and real incomes are relatively low.
Rich countries were first poor. It was because of economic freedom and better institutions that they became rich—not because of minimum wage laws. The number of jobs depends on relative wage rates, other things constant. If changes in technology, institutions, and capital per worker increase productivity, then over time both employment and output will increase along with real incomes. If those other factors don’t change and the government simply dictates higher wage rates, then jobs will be lost or not created for lower-skilled workers.
A “fair wage” is a “free wage”—that is, one that results from voluntary exchanges among workers and employers. Government should prevent fraud and violence and allow individuals to enter into mutually beneficial exchanges under a just rule of law that protects persons and property. The minimum wage violates freedom of contract and hence private property rights; it is neither moral nor effective. It is unfair to workers who can’t find a job, especially young workers in search of a better future.