Minimum Wage Maximum Folly

Economic theory is quite simple but yields powerful predictions. You don't have to be an economist to understand economics. It's easy. Say you commissioned me to do a study to make recommendations on how to eliminate Haitian poverty. Upon completion of the study I tell you what's needed is for the Haitian legislature to enact a $7.00 an hour minimum wage law. That way Haitians would no longer be poor. President Clinton and Department of Labor Secretary Robert Reich would probably compliment me on my findings, but you'd probably say, "Williams, you are a fool." You'd be right. If higher miminum wages were an effective anti-poverty device world poverty would have been eliminated ages ago.

Minimum wage proponents say higher minimum wages won't cause unemployment. The first fundamental law of demand, to which there are no exceptions, says when prices rise people tend to buy less and when they fall people tend to buy more. When beef prices rise we buy less. When interest rates rise we take out fewer mortgages. After all if people didn't respond that way sellers could charge any price they wanted and we'd still buy it. Labor services are no different. When its price exceeds its value - what labor can produce - employers will buy less of it and seek substitutes. Among those substitutes are automation, moving to a lower wage country and customer self-service.

"Williams," you say, "but what can be done to raise people's wages?" Low wages are more a result of people being under productive rather than underpaid. They simply do not have the skills to produce and do things their fellow man highly values. Seldom do we find poor highly productive individuals or nations. Those who earn low wages tend to have low skills and education. Our challenge is how can we make these people more productive? Raising minimum wages will not raise worker productivity; however, it can sabotage worker potential to acquire higher productivity.

Put yourself in the place of an employer and ask: if I must pay Clinton's minimum wage of $5.15 per hour, does it pay me to hire a worker so unfortunate as to have skills enabling him to produce only $3.00 an hour worth of value? Most employers would see that as a losing economic proposition and wouldn't hire such a worker. Therefore, a major impact of the minimum wage law is to discriminate against the employment of low skilled workers. The denial of a job makes the disadvantages of low skilled workers more permanent. After all one of the most important means to higher skills is to be employed in the first place and receive on-the-job training and learn about other opportunities.

Among academic economists there is little or no debate over the unemployment effects of minimum wages. Our only debate is the magnitude of unemployment. Close to 90 percent of academic economists agree minimum wages cause unemployment especially for teenagers, particularly black teenagers. Check it out yourself: introductory college textbooks in most sciences represent a distillation of what constitutes a broad consensus in the field. Virtually all economic textbooks, that say something about minimum wages, conclude it causes unemployment.

People working at or near the minimum wage are exercising their best known alternative. Even though their income is meager we shouldn't destroy that alternative just so we can feel good. The minimum wage and other regulations help explain why today's underclass has taken on a permanency not typical of yesteryear. I'm with Majority Leader, Congressman Dick Armey. The minimum wage law is evil legislation and deserving of repeal altogether.

Walter E. Williams
March 20, 1995
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