Minimum Wage: Fodder for Increased Unemployment and Inflation

I promised myself I wouldn’t subject myself to Obama’s State of the Union Address and I honored my promise.  But, what I didn’t promise myself was to not read all of the ensuing coverage of Obama’s 90 minute commercial promoting his liberal agenda.  So I found myself reading a piece by CNN (the headline sucked me in) on Obama’s plan to raise the minimum wage.  A plan, mind you, that even the left leaning CNN points out will result in increased unemployment.  Bet that ran a tingle up Chris Matthews’ leg.

Since CNN showed enough journalistic integrity for a chance, I thought I’d expand on why the minimum wage concept is such a bad idea.  Aside from using common sense, I also referred to tried and true conservative reference book, “Economics in One Lesson” by Henry Hazlitt.  Written in 1946, you’d never know the material is 67 years old since his assertions remain true to this day.  And that includes his comments on the flaws of minimum wage laws.

The aforementioned CNN article points out that, if Obama gets his way. 15 million employees would get raises.  Great news! But, they also point out that over 400,000 people will lose their jobs.  Sounds like a fair trade doesn’t it:  About 15 million people get raises that still leave them in the poverty range while a mere 400,000 of their peers lose their jobs.  I wonder how those 400,000 will feel about the minimum wage law.

In spite of CNN’s efforts to report the facts on minimum wage increases, they miss several points that Mr. Hazlitt astutely does recognize and expounds upon in his book.  Here are some of the highlights he points out:

• Minimum wage laws are a limited tool whose harms exceed the benefits.
• Those who don’t offer value in excess of the mandated minimum wage are no longer employable.
• In some cases employees aren’t paid market value.  Those case are typically isolated where competitive market forces don’t operate freely or adequately.  In those case unionization would be a more appropriate solution with far less harm to the overall labor market. (Trust me! I had to swallow hard to make a case for unionization.  But the scenario Hazlitt references is akin to the labor market present in the early 1900’s that my grandfather, a union organizer, faced.)
• The liberals will argue that the additional cost of labor would merely be passed on to consumers.  They’re right.  And they’re wrong.
  • A higher price may not be tolerated by consumers.  They make seek a substitute.
  • If consumers tolerate the price increase, they may just buy less.
  • If the price can’t be passed on to consumers the producer may go out of business.  That means more unemployment.
• Some will argue that, “If the only way the producer can survive is by paying “starvation wages,” so be it.  They should go out of business.”
  • This overlooks the reality that the consumer will then be denied that product.
  • Again, it ignores the reality that those workers will now be unemployed.
  • It also ignores the fact that, although the wages were supposedly substandard, they were likely best available, else those workers would have gone to work elsewhere at higher wages.
• The government addresses the unemployment problem by paying unemployment benefits to those who lost their jobs due to the policies meant to increase their wages.  Those folks are now collecting (notice I didn’t say “earning”) less than the “starvation wages” they were earning before the minimum wage laws were put in place.
• By forcing workers into unemployment the government policy is now depriving those workers of the independence and self-respect that come from self-support.
• But, liberals will argue, “We can address this unfair treatment of the unemployed by paying benefits equal to minimum wage.”  But, there we’ve created the moral hazard of paying a worker the same for staying home as for being productive and earning a day’s wages.  (What Hazlitt wouldn’t see in his lifetime is a society in which fully one half of its citizens is dependent upon government largesse exactly because of the moral hazards created by a welfare state).

Hazlitt further elaborates by pointing out that there aren’t ways to improve wages.  He strives instead to make clear that raising wages by government fiat is the wrong way and the worst way.  The reality is that we can’t distribute more wealth than is created.  Further, we can’t in the long run pay labor at a rate that exceeds that which is produced by that labor.

One area that I don’t think Hazlitt spent enough time on is the inflationary aspect of minimum wage laws.  But, give CNN some credit by indirectly alluding to inflation in their article.  As they noted, buying power has eroded since the last wage increase mandated by the government.  What they don’t say is that buying power is eroded by inflation and that mandated minimum wage laws result in inflation.  If McDonalds is forced to pay more per hour for a burger flipper, then McDonalds is going to pass that cost on to us, the consumer.  Us consumers include those who just benefited from a government mandated raise.  Before long, the buying power of those wages has been eaten up by the increased cost of burgers and fries at McDonalds and every other employer forced to pay higher wages.

As has clearly been shown in a free market, the best way to raise wages is to increase the productivity of its labor force.  This has been accomplished throughout history through machinery, technology, inventions, improvements, ore efficient management, better leadership, self motivation of employees, better education and training.  As an employee increases his productivity the more value he creates for consumers and employers and the more he will be paid.  As Hazlitt concludes, “real wages come out of production, not out of government decrees.”

Photo by cydneycap (CC by 3.0)