Tuesday, November 15, 2005

Minimum Wage And Unintended Consequences

Thomas Sowell makes an excellent point about minimum wage laws:

The first federal minimum wage law, the Davis-Bacon Act of 1931, was passed in part explicitly to prevent black construction workers from "taking jobs" from white construction workers by working for lower wages. It was not meant to protect black workers from "exploitation" but to protect white workers from competition.

Even aside from a racial context, minimum wage laws in countries around the world protect higher-paid workers from the competition of lower paid workers.

Often the higher-paid workers are older, more experienced, more skilled or more unionized. But many goods and services can be produced with either many lower skilled workers or fewer higher skilled workers, as well as with more capital and less labor or vice-versa. Employers' choices depend on the relative costs.

This is an important point. As I've pointed out on other forums, another unintended consequence of minimum wage laws is that by raising the cost of hiring new employees, they lower the number of people a firm can hire. Thus, fewer jobs are created.

It has been argued that minimum wage laws are needed to guarantee a "living wage"; however, in nations with low permanent levels of unemployment (like the U.S.) the necessity of going without a job for any lengthy period of time is quite low. On the other hand, in European nations with persistently high, double-digit unemployment it could well be argued that a lower-paying job is better than no job at all. When one adds job mobility (the idea that workers don't stay in entry-level jobs for any significant amount of time) into the mix, the "living wage" begins to look more like a barrier to entry for young, unskilled workers than a real benefit:

The net economic effect of minimum wage laws is to make less skilled, less experienced, or otherwise less desired workers more expensive -- thereby pricing many of them out of jobs. Large disparities in unemployment rates between the young and the mature, the skilled and the unskilled, and between different racial groups have been common consequences of minimum wage laws.

That is their effect whether the particular minimum wage law applies to one sector of the economy like the Davis-Bacon Act, to the whole economy like the Fair Labor Standards Act of 1938 or to particular local communities like so-called "living wage" laws and policies today.

We wonder why we see persistently high unemployment rates among young black men, minorities, and unskilled female workers. These are precisely the groups minimum wages laws (if you were listening to folks like Ted Kennedy bloviate during the recent Supreme Court confirmation hearings) were designed to help.

But all too often these laws are passed by those with no real understanding of economics, and paradoxically they end up hurting the very groups they were designed to help. But don't tell that to Teddy Kennedy.


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