$4.25/Hour Syndrome

"Four twenty-five an hour! I work all week long and I can barely afford to pay my rent! This is ridiculous! Who's running this country anyway?" Comments like these are often made about our minimum wage. The American public, often referred to as rationally ignorant voters, are complaining that the "low" minimum wage should be raised. Instead of raising it, however, we should reduce it; better yet, we should repeal the minimum- wage law altogether. The minimum wage law, let alone increases in its level, is very harmful to low-income workers and to our country over the long run.

Unemployment
A cornerstone in the argument against an increase in minimum wage is that it will also cause an increase in unemployment. If the cost of hiring a worker is above his market level, the worker is no longer needed because he does not create profit. The demand for lower-skilled workers, people typically paid the minimum wage, decreases. Many are not hired. This causes unemployment to rise, or a surplus in labor.

This rise in unemployment causes more harm to Americans than is often realized. When minimum-wage jobs for lower-skilled workers are eliminated, the worker will not be hired. With a job, however menial, a person can learn new skills; eventually he will become more valuable to his employer and thus be paid more. If he is not hired in the first place, he will not develop the new skills from job training. Instead of gaining the self-confidence and experience from performing a job well, he will lose out. He will become even more unproductive than before because he will not even be using the skills he has. Low-skilled jobs are potential catapults. They can be used to learn more skills that lead to advancement in the labor market. Without them, economic growth is stifled and a possibly highly valuable worker is lost.

Teenagers
The negative effect on teenagers is even more pronounced than for adults. Over one third of minimum wage earners are teenagers.¹ A job is a highly valuable experience for people in this age category. It creates incentive to work, responsibility, and other values sometimes not taught at home. The incentive to work in the job often carries over into other areas, such as school. A teenager might decide that he does not like his minimum-wage job, and therefore will work harder and continue further in school, in an effort to secure a better job for the future. Without this valuable experience, the incentive to work hard in any area will be reduced. A job also occupies much of the youth's time. An increase in teenage unemployment means that time will be spent in an unproductive and possibly dangerous manner. "Idle hands are the devil's workshop." Free time can lead to excessive drugs, alcohol, crime, sex, disease, and other such harmful activities.

Exploiting Unskilled Workers
Then there are working conditions. Those who do hold on to their minimum-wage jobs might not be treated as well because they can be more easily replaced. They might not get the hours or vacations they request, because the employer will likely not be as cooperative. With thousands of other people available for hire, the firm is less likely to meet anyone's needs. Since the competition for jobs is increased, the employee might be forced to do other tasks not ordinarily required. Employee exploitation is thus likely to increase. Instead of gaining self-confidence from a job well done, the worker will experience a decrease in happiness due to poor treatment. The increase in wages would not necessarily compensate for this decline in working conditions.

But this assumes there will be an actual wage increase just because of a change in the law. Nothing could be further from the truth, at least in the long run. To be sure, in the short run, a boost in the minimum wage will mean increased pay for some (and unemployment for others). But as time wears on, those who kept their jobs with a pay raise, will start to be fired. Why? Because it takes time to search for new, cheaper alternative factors of production, such as skilled labor and capital.

When the minimum wage level rose from forty cents to seventy-five cents per hour several decades ago, not one single solitary elevator operator lost his job . . . the very next day. All enjoyed increased pay. After all, the building manager needed them to run this piece of equipment. But over the next few years, automatic elevators (e.g., capital and the skilled labor necessary to manufacture, install, and repair them) began to take the place of manually operated ones. Several years later, all of those who "gained" from the compulsory wage hike had lost their jobs. Yet not a one of them, probably, realized why he was now unemployed. Quite possibly, this was attributed to automation. But the real reason was that at the higher wage of seventy five cents but not at the lower one of forty cents it paid to supplant this unskilled labor.

"Minority" Economics
An increase in labor supply may lead to more discrimination. The minimum wage raises the supply of labor, but reduces the demand for it. With a labor surplus, employers have thousands of workers to choose from. Those who are racist or discriminatory against women will now be able to be highly selective during the hiring process. They will not lose money if they refuse to hire people from among the minority groups.

In contrast, suppose there were no minimum wage law. Then racist or sexist employers will lose profits if they indulge their tastes for discrimination. How does this work? Assume that unskilled workers, whether white or black, male or female, have a productivity level of three dollars per hour. Their wages will tend to equal this amount. Any firm which paid more would lose money or go bankrupt. Any that paid less would suffer a high quit (or raiding from other employers) rate, and would be unable to attract a labor force.

We now introduce racial and/or sexual discrimination on the part of some employers. They refuse to hire blacks and/or females. As a result of this decreased demand, wages to these groups fall, say to two dollars per hour. But the productivity of these unfortunates is still three dollars. Thus, the non-discriminating employers can "exploit" their workers to the tune of one dollar per hour ($3-$2) while the discriminators pay three dollars for three dollars worth of productivity, earning a zero profit (in equilibrium). This situation is unstable and cannot last. The non-discriminators, with their extra one dollar per hour per laborer, will be able to underbid and drive into bankruptcy their discriminatory competitors. The moral of this story is that if you want to discriminate under free enterprise, you'll have to pay for it in terms of profit loss and bankruptcy. But with interventions as minimum-wage, cut-rate discrimination is the order of the day. Since it is now impossible for the non-discriminators to undercut the discriminators, the latter no longer have to pay for their practices.

Also, the minimum-wage workers who would be fired because of the wage increases are more likely to be women or from a minority group. This is because women and minority groups comprise the highest percentage of minimum-wage workers. Since they also represent the highest percentage of those unemployed, this percentage would just increase, thereby harming these downtrodden groups even more.

National Harm
The country as a whole pays the price of a minimum-wage law. Because of the unemployment effect, a nation will not produce as much. But one of the most valuable resources of a nation is its people. When everyone is working, a nation is using all of its resources to their maximum capacity. Therefore it is producing, at least potentially, at its highest output level. With widespread unemployment, the nation's resources are not being fully used. This decreases the overall productivity of a nation. A nation can no longer be using every resource efficiently.

Another harm arises because everyone will no longer be working in the area for which he has a comparative advantage. An example of this would be a restaurant where an increase in minimum wage would result in fewer workers to prepare the food. The managers, who have higher skill levels, would be needed to assist in food preparation. The opportunity cost when they make the food is high because they could have been working in an area that requires the maximum use of their skills. If they were to work in the area for which they have a comparative advantage, managing, and the food preparers were to remain at their own task, then the overall productivity of the restaurant would increase. This example can be applied to the entire labor force. If everyone is doing that which he is best suited for, then a nation's productivity is enhanced. The minimum wage prevents this from happening because fewer low-skilled workers are hired. Other workers do the job and less is produced. A nation cannot grow as quickly when this occurs. The skills of the misallocated people atrophy. This also slows a nation's economic growth because the workers are not improving their human capital.

Further, the resultant unemployment will create additional dependence on programs like welfare. The government will have to spend more money on helping the unemployed that is the least they can do after creating the problem in the first place, it will be thought. The opportunity cost of additional spending is higher than just the dollar amount spent. This money could have been invested in areas that create profit. This could be in a simple interest-bearing account or in higher-risk, higher-profit investment. Instead, it is handed out with little to no return on investment.

The Poor?
The aim of the minimum wage is to increase the income of the families who are living in poverty. But who really earns this level? It is mostly teenagers, or part-timers who are not the primary supporters of the household. For example, in 1992 less than 10% of those who were below the poverty line and working heads of households earned the minimum wage.² This shows that the increase even were it to occur would not really help the people it is supposed to help. Most of the poor are already unemployed, so minimum wages do not affect them. It does affect people like teenagers. Some see the effect of the increase in their paycheck, but several others are never hired. This leads to an overall negative impact on the teenage group.

Benefits of No Minimum Wage
Suppose the minimum wage were to be eliminated entirely. There would be an increase in employment because firms would hire the lower-skilled worker. It would now be profitable to employ people with a work productivity of three dollars per hour, for example, which is below the current minimum wage. Many will argue that hiring someone at such low wages is exploitation, but the workers would be earning more than they had been before they were employed, namely zero. As time goes on, these workers would acquire more skills and, in turn, become more valuable to their employer. When their productivity increases, they will be compensated with higher wages.

Their occupational mobility will also increase with time as a result of the newly acquired skills. These workers could have the chance to find the job they are best suited for. This advancement in skills and in the amount of workers who would be working in their fields of comparative advantage, leads to a higher level of employee happiness. This arises from factors such as higher income, job security and self-confidence. Elimination of the minimum wage also leads to the overall advancement of a nation, where the job cycle is allowed to move freely. Lower skilled workers are paid less until they acquire new skills and give up their low-skill job to the next person. This cycle increases productivity and helps the country compete internationally.

Why do we retain the minimum wage and even contemplate raising its level when its effects are so obviously harmful? One answer is that in the short run, its effects seem to be beneficial. Many people see the actual dollar amounts on their paychecks increasing. They don't realize that in the long run they will not have a job and that others will never be hired. Another answer is that high and increasing minimum-wage levels actually benefit a small (some 13% of the private labor force) but powerful special interest group: unions. Whenever organized labor demands a wage increase, the first reaction of the employer is to look for cheaper replacements, e.g., unskilled workers. What better way to destroy this competition than to price them out of the market? And this despite the fact that they are likely to be poor, helpless, young, black people with problems.

The electorate perpetuates the minimum-wage disaster by voting for politicians who promise to raise the minimum wage. The politicians, in turn, are eager to do this in order to hold on to their offices. This can be seen with President Clinton's sudden change of attitude towards minimum-wage increases. All of a sudden, he favors an increase to $5.15 across the nation. How convenient that this change of heart should come about during an election year. Why didn't this increase appeal to him earlier? Maybe he actually took the well-being of this nation into consideration. Since it was almost November, GNP was not as high on his priority list as were votes.

Conclusion
This perpetuation of the minimum wage problem must stop. It has to begin with the voter because it is clear that the politicians are not willing to sacrifice votes in order to stop the cycle. The voters must be informed accurately on these harmful effects of minimum wage. Maybe then, the comments about only making $4.25 an hour will change to, "Guess what?, unemployment is down!"

Notes

1. The Economist, "Blair Minimum," 9/9/1995, 58.

2. The Economist, "Of Magic, Myth and the Minimum-Wage," 9/30/l995, 94.

3. The Economist, "The Ups and Downs of the Minimum-Wage," 4/27/95, 25.

4. James D. Gwartney, and Richard L. Stroup, Economics: Private and Public Choice (The Dryden Press, 1995), 694-697.

5. Dee Dee Stanback, The Wall Street Journal, "The First Rung on the Ladder, " 4/1/96.