Minimum Wage, Maximum Folly

President Clinton and many members of Congress have proposed raising the minimum wage from its current $5.15 per hour to $6.15. Most academic economists who've studied the minimum wage conclude that higher minimum wages cause unemployment, not so much among the general labor force, but among low-skilled workers, especially teenagers. Differences in unemployment rates reflect this: the unemployment rate for adults over 25 years is 3.1 percent; for teenagers it's 14.3 percent.

You say, "Williams, the President and Democrats love America's children. If the minimum wage hurt them, why would liberals support such a monstrosity?" First, you have to recognize the reward and punishment structure in political life. The fact of business is that no Congressman or Senator owes his seat to the teenage vote, but many do owe their seats to the union vote and other interests who benefit from higher minimum wages. Thus, in the hurly-burly hardball of political life, you dump on people who can't dump back on you.

To understand how people can benefit from the minimum wage, let's examine the general principle of Congress setting minimum prices using a non-labor example. Businessmen and labor unions frequently belly-ache about foreign manufacturers charging too low a price for a product. They call on Congress or the White House to bully foreign manufacturers to raise their produce prices or they lobby Congress to raise tariffs. Do you think American businessmen and labor unions want foreign goods to sell at higher prices because they're concerned about and want to raise the living standards of foreign producers and their workers? If you think so, I have a bridge to sell you. Their sole motivation is to set higher minimum prices on foreign goods so they can get away with charging higher prices for American-made goods as a means to higher profits and higher wages.

The identical principle explains the union's push for higher minimum wages. If unions can make part of the labor market less competitive through minimum wages, they can demand higher wages for their members. Businesses may also benefit from higher minimum wages. For example, let's go back several decades and pretend you produced automatic dishwashing machines. Your salesmen put on a sales pitch, but restaurant owners say, "Why should we buy your costly machines when we can hire people to wash dishes for $2.00 per hour? It isn't worth it." You would benefit from Congress raising the minimum wage to say $4.00 per hour. Why? It raises the cost of restaurant owners using people to wash dishes. Thus, they'd have greater financial incentive to buy dishwashing machines from you.

Supporters preach that minimum wages don't cause unemployment for low-skilled workers. But ask them why they pushed so hard for Congress to enact the Welfare-to-Work Tax credit and the Work Opportunity Tax Credit. Both tax credits have the effect of reducing the employer's wage cost to low-skilled entry level workers by 35 percent or to $3.33 per hour.

The real problem for low-skilled workers is not that they're under paid, but that they're under productive. The solution is to improve their skills and education. One of the ways to do this is to have a climate where youngsters can have early work experiences. The little bit of money a youngster can earn after school and weekends is nice but not nearly as beneficial as the lessons learned such as: proper work attitudes, promptness, and respect for supervisors. For youngsters living in dysfunctional homes and attending rotten schools, a job might be their only chance to learn something that will make them more valuable workers in the future. I'm glad today's do-gooders weren't around in the 1940s when I was a teen.

Walter E. Williams
May 18, 1999
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