Chapter 11 - Minimum Wage Laws
Just as we can better understand the economic role of prices in general when we see what happens when prices are not allowed to function, so we can better understand the economic role of workers’ pay by seeing what happens when that pay is not allowed to vary with the supply and demand for labor.
Minimum wage laws make it illegal to pay less than the government specified price for labor.
Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount—and, if it is not, that worker is unlikely to be employed.
Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they either lose their jobs or fail to find jobs when they enter the labor force.
Unemployed workers are not surplus in the sense of being useless or in the sense that there is no work around that needs doing.
The unemployed are made idle by wage rates artificially set above the level of their productivity.
The explicit minimum wage rate understates the labor costs imposed by European governments, which also mandate various employer contributions to pension plans and health benefits, among other things.
A belated recognition of the connection between minimum wage laws and unemployment by government officials has caused some countries to allow their real minimum wage levels to be eroded by inflation, avoiding the political risks of trying to repeal these laws explicitly, when so many voters think of these laws as being beneficial to workers.
Labor unions also benefit from minimum wage laws, and are among the strongest proponents of such laws, even though their own members typically make much more than the minimum wage rate.
Just as most goods and services can be produced with either much labor and little capital or vice versa, so can most things be produced using varying proportions of low-skilled labor and high-skilled labor, depending on their respective costs, relative to one another. respective costs, relative to one another.
The higher the minimum wage goes, the more the unskilled and inexperienced workers are likely to be displaced by more experienced and higher skilled unionized workers.
Just as businesses seek to have government impose tariffs on imported goods that compete with their own products, so labor unions use minimum wage laws as tariffs to force up the price of non-union labor that competes with their members for jobs.
Even though most studies show that unemployment tends to increase as minimum wages are imposed or increased, those few studies that seem to indicate otherwise have been hailed in some quarters as having “refuted” this “myth.”
It would be comforting to believe that the government can simply decree higher pay for low-wage workers, without having to worry about unfortunate repercussions, but the preponderance of evidence indicates that labor is not exempt from the basic economic principle that artificially high prices cause surpluses.
Unemployment varies not only in its quantity as of a given time, it varies also in how long workers remain unemployed.
Countries which drive up labor costs with either high minimum wages or generous employee benefits imposed on employers by law, or both, tend to have longer-lasting unemployment, as well as higher rates of unemployment. tend to have longer-lasting unemployment, as well as higher rates of unemployment.
Sometimes a minimum wage is imposed not by law, but by custom, informal government pressures, labor unions or—especially in the case of Third World countries—by international public opinion or boycotts pressuring multinational companies to pay Third World minimum wage laws are those who are younger, less experienced or less skilled workers wages comparable to the wages usually found in more industrially developed countries.
In country after country around the world, those whose employment prospects are reduced most by minimum wage laws are those who are younger, less experienced or less skilled.
Another group disproportionately affected by minimum wage laws are members of unpopular racial or ethnic minority groups.
The wide gap between the unemployment rates of black and white teenage males likewise dates from the escalation of the minimum wage and the spread of its coverage in the 1950s.
Just as we can better understand the economic role of prices in general when we see what happens when prices are not allowed to function, so we can better understand the economic role of workers’ pay by seeing what happens when that pay is not allowed to vary with the supply and demand for labor.
Minimum wage laws make it illegal to pay less than the government specified price for labor.
Making it illegal to pay less than a given amount does not make a worker’s productivity worth that amount—and, if it is not, that worker is unlikely to be employed.
Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they either lose their jobs or fail to find jobs when they enter the labor force.
Unemployed workers are not surplus in the sense of being useless or in the sense that there is no work around that needs doing.
The unemployed are made idle by wage rates artificially set above the level of their productivity.
The explicit minimum wage rate understates the labor costs imposed by European governments, which also mandate various employer contributions to pension plans and health benefits, among other things.
A belated recognition of the connection between minimum wage laws and unemployment by government officials has caused some countries to allow their real minimum wage levels to be eroded by inflation, avoiding the political risks of trying to repeal these laws explicitly, when so many voters think of these laws as being beneficial to workers.
Labor unions also benefit from minimum wage laws, and are among the strongest proponents of such laws, even though their own members typically make much more than the minimum wage rate.
Just as most goods and services can be produced with either much labor and little capital or vice versa, so can most things be produced using varying proportions of low-skilled labor and high-skilled labor, depending on their respective costs, relative to one another. respective costs, relative to one another.
The higher the minimum wage goes, the more the unskilled and inexperienced workers are likely to be displaced by more experienced and higher skilled unionized workers.
Just as businesses seek to have government impose tariffs on imported goods that compete with their own products, so labor unions use minimum wage laws as tariffs to force up the price of non-union labor that competes with their members for jobs.
Even though most studies show that unemployment tends to increase as minimum wages are imposed or increased, those few studies that seem to indicate otherwise have been hailed in some quarters as having “refuted” this “myth.”
It would be comforting to believe that the government can simply decree higher pay for low-wage workers, without having to worry about unfortunate repercussions, but the preponderance of evidence indicates that labor is not exempt from the basic economic principle that artificially high prices cause surpluses.
Unemployment varies not only in its quantity as of a given time, it varies also in how long workers remain unemployed.
Countries which drive up labor costs with either high minimum wages or generous employee benefits imposed on employers by law, or both, tend to have longer-lasting unemployment, as well as higher rates of unemployment. tend to have longer-lasting unemployment, as well as higher rates of unemployment.
Sometimes a minimum wage is imposed not by law, but by custom, informal government pressures, labor unions or—especially in the case of Third World countries—by international public opinion or boycotts pressuring multinational companies to pay Third World minimum wage laws are those who are younger, less experienced or less skilled workers wages comparable to the wages usually found in more industrially developed countries.
In country after country around the world, those whose employment prospects are reduced most by minimum wage laws are those who are younger, less experienced or less skilled.
Another group disproportionately affected by minimum wage laws are members of unpopular racial or ethnic minority groups.
The wide gap between the unemployment rates of black and white teenage males likewise dates from the escalation of the minimum wage and the spread of its coverage in the 1950s.
