Minimum Wage Laws and Unemployment

Let’s say we have a medicinal drug that will raise the pay of all low-income workers. If this cure for lower wages is successful, money will pour into the pockets of thousands of needy people! This could make their lives better boost the entire economy. The question is, how legitimate is this cure? Does it have negative side effects? Many people and organizations have spoken in favor of such a cure: raising the minimum wage, some even to $15 an hour. $15 minimum wage measures have already been passed in Minneapolis (Dobuzinskis, 2017), Seattle (Wallace, 2014), Los Angeles (Jamison, Zahniser, & Walton, 2015), and many other cities across the United States.

Minimum wage laws force employers to pay higher wages to their employees. These wages are not determined by voluntary exchange in the free market but are determined by a government-mandated minimum wage law. Businesses are forced to cut hours, switch to technological substitutes, or lay off some of their workers altogether. Money that would have been used in production would then go to employees, causing prices to rise. This rise in prices would make it harder for consumers to purchase different products in the market. All things being equal, minimum wage laws lower business productivity and increase wage inequality. Minimum wage laws hamper the economy and negatively affect low-income workers and businesses. Lowering minimum wage or repealing minimum wage laws altogether would reduce unemployment and help the economy as a whole.

The effects of minimum wage laws can be mitigated by voting for or otherwise supporting candidates who will vote to repeal or reduce the effect of minimum wage laws. Writing articles against minimum wage laws is another way to combat government intervention in the labor market. Finally, citizens can write to their legislators to vote against legislation that raises minimum wage laws. Government intervention in the economy tampers with prices and incentives in the free market, and removing these interventions can spur economic growth.

To better understand why minimum wages cause unemployment, take a look at the diagram below:

(image from Mitchell, 2015)

The market dictates an equilibrium wage where most employers and employees would agree on a price. The equilibrium wage is the intersection of the supply and demand curves in the labor market. The supply curve rises from left to right because laborers will provide more labor at higher wages. In other words, the higher the pay is, the more workers will want to apply. Employers are just the opposite from employees; the lower the wage is, the more labor they demand. Employers are more willing to hire workers at lower wages, and employees are more willing to apply for a job with higher wages. (Mitchell, 2015)

When a minimum wage law is passed and enforced, wage rates are not allowed to return to the equilibrium wage. This results in a larger quantity supplied than quantity demanded at the new wage set by the minimum wage law. When there is more of any resource supplied than is demanded, it creates a surplus. A surplus in labor is the same as unemployment. Unemployment reduces the efficiency of an economy because there is labor that is not being used to produce desired products for the economy. Minimum wage laws are bad for those who are unemployed but are also bad for the economy as a whole.

We can see the effects of minimum wage laws in the cities which passed laws to raise the minimum wage. In Seattle, where minimum wage laws have been passed to raise the minimum wage to $15 gradually, one study estimated that the time worked by low-income workers fell by 3.5 million hours per quarter (Tabarrock, 2017). Jones (2015) reported in Seattle magazine that many Seattle restaurants, some longstanding businesses, closed down after the minimum wage law was passed.

Minneapolis passed its law only a few months ago at the time of this writing, but according to Nelson (2017), several business owners have acknowledged the difficulty that the law will bring to their businesses. Jane Elias, the founder of nonprofit organization Simply Jane Studio in South Minneapolis, said that she would have to cut down on programming to absorb the cost of the minimum wage law for her business. Jane also said that she was considering moving out of Minneapolis. “Minneapolis has so many restrictions and regulations as it is. It’s almost impossible to do business,” she said (as cited in Nelson, 2017). Star Tribune also included the case of Karen O’Connor, who said that she was already trying to figure out where she could raise prices in her store due to the minimum wage law (Nelson, 2017).

When businesses close down, there are fewer opportunities for workers to get jobs. Surviving businesses may have to lay off workers to pay the wages of their remaining workers. As we saw in the supply and demand chart, minimum wage laws cause unemployment and inefficiency in the economy.

How about minorities? Wouldn’t a minimum wage help them? According to Dr. Thomas Sowell, historical data indicates otherwise. Even in the face of open discrimination and prejudice, black laborers had unemployment rates that were both lower than they are today and similar to the rates as white laborers. During the 1930s, the federal government of the United States began introducing federal minimum wage laws. Their effect was put off by the wartime inflation of the 1940s, but the laws were amended after the war in the 1950s. At this time, the unemployment gap between black and white teenagers increased.

Sowell also said that the first minimum wage law passed in the USA, the Davis-Bacon Act of 1931, was passed in part to protect white construction workers from the competition of black construction workers working for lower wages. He goes on to say that minimum wage laws around the world tend to protect higher-income workers from the competition of lower-income workers. (Sowell, 2005)

Minimum wage laws also cause businesses to replace employees with technology. When labor is made more expensive by a minimum wage law, businesses may switch to technology that was previously more expensive than the labor of their employees. This would be another reason minimum wage laws can cause unemployment in the economy (Bier, 2015).

Customers also suffer under a minimum wage increase. When businesses close down or raise their prices, customers have a harder time obtaining the items they want to purchase. Sarah Lemos, from the University of Leicester, analyzed several studies before 2005 on the price effect of minimum wage. One important study she examined studied the effects of the federal minimum wage in the 1970s. Because of the lower living costs in the south, especially during the 1970s, every 10% increase in the minimum wage increased prices by 2.7% (Sherk, 2017). The money that would be going to improving the business and their services would now be going to pay higher wages. Therefore, both customers and employers will be affected by a minimum wage law.

Some may say that lowering or abolishing minimum wage would cause employees to lose their raise and increase wage inequality. If minimum wage laws are repealed, the labor market would be allowed to return to the equilibrium price. Allowing the market to return to an equilibrium price would decrease unemployment by eliminating the labor surplus and would allow more people to get jobs. Businesses would also be in a better condition than before and would be able to provide better services at lower prices to their customers. Some of these customers would be lower-income workers themselves. Without minimum wage laws, the economy would experience a net gain rather than a net loss.

Some people cite certain studies such as the famous 1995 Card-Krueger study in defense of minimum wage laws. The study examined businesses in Pennsylvania and New Jersey when New Jersey raised its minimum wage and Pennsylvania did not. They concluded that a small increase in the minimum wage results in a very small reduction in employment; they also said that it could even raise in employment in some cases. (MacKenzie, 2006).

MacKenzie said in a later article that Card and Krueger had been widely criticized for their analytical methods. They based their data off of phone surveys conducted research assistants; these surveys consisted of asking employers about their employees. In 2000, Neumark and Wascher examined the actual payroll data of the businesses in the same geographical region that Card and Krueger studied. They discovered that the New Jersey minimum wage decreased labor demand in New Jersey by 4%, just would be expected from standard economic theory. They also said that Card and Krueger’s data suffered from severe measurement error. The Card-Krueger study was not the first study of the effects of minimum wage. There were many studies conducted prior to Card and Krueger that reported the negative effects of minimum wage laws (MacKenzie, 2007).

As a country, we should resist the urge of minimum wage laws, even though they seem beneficial to lower-income workers at first sight. Minimum wage laws don’t allow markets to reach the equilibrium wage and cause a surplus of labor. We as a country should push for lower minimum wage laws to free the markets, decrease unemployment, and help businesses provide for their customers. If we work against government intervention in the economy, we can increase production of what people demand and work for a better overall living standard. When we look at the “side-effects” of minimum wage laws, our “cure” doesn’t look very appealing. Let’s work for a freer, healthier, and more productive economy.

Sources cited

Bier, D. (2015, June 23). New York Orders Fast-Food Workers Replaced With Robots, Kiosks, Mobile Apps. The Foundation for Economic Education. Retrived from https://fee.org/articles/new-york-orders-fast-food-workers-replaced-with-robots-kiosks- mobile-apps/

Dobuzinkis, A. (2017, June 30). Minneapolis approves gradual minimum wage hike to $15 an hour. Reuters.com. Retrieved from https://www.reuters.com/article/us-minnesota- minimumwage/minneapolis-approves-gradual-minimum-wage-hike-to-15-an-hour- idUSKBN19L2JT

Jamison, P., Zahniser, D, & Walton, A. (2015, May 19). Los Angeles’ minimum wage on track to go up to $15 by 2020. Los Angeles Times. Retrieved from http://www.latimes.com/local/lanow/la-me-ln-minimum-wage-hike-20150518-story.html.

Jones, S. (2015, March 4). Why Are So Many Seattle Restaurants Closing Lately? Seattle Magazine. Retrieved from http://www.seattlemag.com/article/why-are-so-many-seattle- restaurants-closing-lately

MacKenzie, D. W. (2006, May 3). Mythology of the Minimum Wage. Mises Institute. Retrieved from https://mises.org/library/mythology-minimum-wage

MacKenzie, D. W. (2007, June 14). Minimum Wage Laws: Economics versus Ideology. Mises Institute. Retrieved from https://mises.org/library/minimum-wage-laws-economics- versus-ideology

Mitchell, D. (2015, May 15). Destroying Jobs with Innumerate Compassion [Web log post]. Retrieved from https://danieljmitchell.wordpress.com/2015/03/15/destroying-jobs-with- innumerate-compassion/

Nelson, E. (2017, June 18). What’s the effect of a $15 minimum wage in Minneapolis? No one knows just yet. Star Tribune. Retrieved from http://www.startribune.com/what-s-the- effect-of-a-15-minimum-wage-no-one-knows-just-yet/429128163/

Sherk, J. (2017, Jan. 19). $15 Minimum Wages Will Substantially Raise Prices. The Heritage Foundation. Retrieved from http://www.heritage.org/jobs-and-labor/report/15- minimum-wages-will-substantially-raise-prices

Sowell, T. (2005, Nov. 15). Ignoring Economics. Jewish World Review. Retrieved from http://www.jewishworldreview.com/cols/sowell111505.asp

Tabarrock, A. (2017, June 27). Seattle’s Minimum Wage Has Been a Disaster, as the City’s Own Study Confirms. Foundation for Economic Education. Retrieved from (https://fee.org/articles/seattles-minimum-wage-has-been-a-disaster-as-the-citys-own- study-confirms/

Wallace, G. (2014, June 3). Seattle approves $15 minimum wage. CNN Money. Retrieved from http://money.cnn.com/2014/06/02/news/economy/seattle-minimum-wage/index.html

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