5.5% Unemployment – the Minimum Wage Factor
Posted by Enrique on 06.09.2008
Playing politics with people’s livelihoods
Although most commentators agree that the U.S. economy is in a downturn (though not necessarily a recession), last month's unemployment rate increase from 5.0% to 5.5% was pretty sobering. Maybe it's because of oil prices, or uncertainty in the housing market, or maybe its just Bush's fault. Damn that Bush. On the other hand, the uptick in unemployment might be related to something you wouldn't immediately expect – the new federal minimum wage hike going into effect this summer.
Last year, the Democrat-controlled Congress raised the minimum wage to $5.85 per hour. It's scheduled to go to $6.55 in July, and top out at $7.25 next year. Of course, no one opposed this minimum wage hike, because no one (certainly not American politicians or voters) understand economics.
Raising the minimum wage hurts poor people. Sound counterintuitive? People earning minimum wage are undereducated, low-skill or entry-level workers. By raising the minimum wage, the government arbitrarily made low-skill/entry-level workers more expensive for employers to hire. Not surprisingly, employers eliminate low-skill/entry level positions, meaning there are less job opportunities for the very people the minimum wage hike is intended to help:
Economic research has shown time and again that increasing the minimum wage destroys jobs for low-skilled workers while doing little to address poverty.
According to economist David Neumark of the University of California at Irvine, for every 10 percent increase in the minimum wage, employment for high school dropouts and young black adults and teenagers falls by 8.5 percent.
So the 5.5% unemployment rate isn't necessarily the result of current jobs being cut – low-skill/entry-level jobs aren't being created in the first place, and new entrants to the workforce are finding themselves s.o.l. It's easy for the MSM to cover an event like a mass layoff at a major corporation, but it's impossible to cover jobs that don't exist because of government meddling with the employment market.
Proponents of minimum wage hikes like to argue along the lines of, "How can you expect someone to make a living on $5.15 an hour?" But how can you expect a low-skill/entry-level worker to make a living without any job at all? If you are in favor of minimum wage increases, you are necessarily in favor of eliminating employment opportunities for the poorest Americans.
But you probably feel really good about yourself, right? In our world of economic ignorance, good intention trumps all.
Economic ignorance? Why point the finger at the little guy instead of those who deserve it? I'm not going to deny the facts of this story, simply the intent. What sense does it make to underpay people to the point where they can't live at all? What logic is the statement "But how can you expect a low-skill/entry-level worker to make a living without any job at all?" There is no logic at all in that statement. They real problem is the corporations making record profit while being allowed to pay a pittance such as $5.15 an hour. I've been in that boat and every little bit helps, even if it means a meager increase to that $7.25 figure. Whomever "Enrique" is needs to do his homework and understand the story before making such broad and idiotic statements.
Posted By: Joe (Guest) on June 09, 2008 at 11:37 PM
What's the incentive to pay minimum wage (or it's increases) when you can continue to pay a much harder working illegal foreigner much less?
No unions, minimal breaks, no complaints - if anything, generally happy to work, and best of all willing to work for less... at least until the US dollar drops enough to where the peso or quetzal is worth more.
Posted By: Miguel (Guest) on June 10, 2008 at 06:54 AM
Payment and Production go hand in hand. US wages could grow more but they depend too much on services, not manufacturing. So, US sloshes money faster today, but it needs to increase the output of value added. This way, minimum wages would grow faster.
Posted By: Charles (Guest) on June 10, 2008 at 08:46 AM
Wow, you totally missed the point of the article all together. If you want to help the "little guy" then you need to lower/eliminate minimum wage. All increasing it does is remove jobs for the "little guy" to fill. Or we can just socialize business, do away with these supposed record profits and then we can all be miserable.
Posted By: Cheriks (Guest) on June 10, 2008 at 09:24 AM
The simple belief I have is you cannot always trust the market to do what is right. I have never been one that believed in the infallability of markets to always set prices and wages properly.
I think Chris Rock said it best about minimum wage. "If I could pay you less, I would." And that is very true to me. MW is a necessary function against unfair business practices. Does it at time hurt small businesses, yes it can. But it remains an important defense mechanism aganinst coporate greed that has plauged our capatalist society (which is still the best thing) since its inception.
Posted By: Andy (Guest) on June 10, 2008 at 09:46 AM
Joe - companies don't pay $5.15 an hour for anyone other than low-skill/entry level workers. "Record profits" have nothing to do with it. The only people who make minimum wage are workers with very little experience. Man, did you even read the whole thing?
You and I may regard $5.15 to be a pittance, but that's because you and I are worth more in the employment market. Poor Americans aren't so lucky. By raising the minimum wage, you're "helping" them by eliminating the only jobs they are qualified for.
Thanks for proving my point about economic ignorance. Cheers.
Posted By: Enrique (Registered) on June 10, 2008 at 10:22 AM
Joe is clearly retarded and missed the point. profit making corporations are not the problem here. It's the raising of the minimum wage..
Posted By: Pete (Guest) on June 10, 2008 at 11:05 AM
I think Chris Rock said it best about minimum wage. "If I could pay you less, I would." And that is very true to me. MW is a necessary function against unfair business practices.
People get paid what the work is worth. Artificially inflating the cost doesn't help; it hurts, and it hurts the people who will take the lower wage but now can't have the job at all because it wasn't created in the first place!
It amazes me how libs can't grasp simple math concepts.
Posted By: Mark (Guest) on June 10, 2008 at 12:47 PM
To suggest that the concept of minimum wage is completely ignorant of economics is itself the most ignorant idea in your whole wonderfully researched little diatribe. There are plenty of economists and economic studies that have illustrated that unemployment has not increased in the face of a minimum wage increase. There have also been studies that show that it does increase unemployment. Either way, do not present the issue as another instance of the "liberals/democrats operate on their feelings" myth - it's a real debate meaning there are two legit sides.
Posted By: Joe (Guest) on June 10, 2008 at 12:57 PM
I think somebody needs to rethink their economics. Ask yourself this: Does it make any sense to increase the disparity between rich and poor? In that case, we should look to Latin America or Brazil for our economic model? Its this disparity that is very much an issue, and goes back to my earlier point of corporate profiteering. I am very much aware that raising the min. wage can cause a problem for small business, but that is where the government comes in the help these businesses through tax breaks, instead of the current policy to extend this welfare to the biggest profiters like the oil companies. It is only through a true living wage can the playing field be leveled, which would also boosst the economy. The more money people have, the more they can spend! Simple concept, seems to be missing from the article. As I said, I am not disputing the fact, simply the reasoning behind it. Would you accept a pay cut from your job while the owner makes more money, simply so that your job exists? It is our responsibility to help those who need it most, especially the poor, and this isnt how you do it
Posted By: Joe (Guest) on June 10, 2008 at 02:58 PM
Many of these low wage jobs go to illegal immigrants. Might want to think about the impact of not enforcing your border laws when writing this column next time.
Posted By: Michael (Guest) on June 10, 2008 at 03:32 PM
I'm thrilled to see an editorial on common sense economics - So thank you. The reality is that government interventions always hurts the poor and small business market for the simple fact that the larger companies can afford to absorb the cost the Feds force on everyone. Wal-Mart wants you to raise the minimum wage, becasue they can afford it more than your local company, so at the end of the day they are the only ones you are helping by inforcing price increases on business owners.
Posted By: Dan Haggerty (Registered) on June 10, 2008 at 05:52 PM
As Joe said, the economics is nowhere near as clear-cut as you make out. Many US economists (David Card is perhaps the most notable) have been unable to find a significant effect on unemployment from increases in the minimum wage. The reason is that your story only holds in a perfectly competetive labour market. When firm exhibit some market power as hirers of labour, they will pay wages beneath the value of the product of the marginal worker. In this situation, the theory predicts moderate increases in the MW will INCREASE employment, as the gap between worker output and wages means firms can afford to increase wages without shedding jobs. This is in any textbook you may care to look at.
Obviously, large increases in MW will eventually have adverse effects on employment. But it is not clear cut where this point is. At the very least, its above the competetive market wage.
Firms may have labour market power for a number of reasons, the most obvious is that once in a job, it is hard to find another, especially if you are a low earner and can't afford to have a couple of days off to go job hunting or go to an interview. Also, it varies across industries and geography - the presence of unionised labour may mitigate this market power, while the high employment of young or part-time workers may increase it. The point is it is not, and may never be, as straight forward as you suggest.
Posted By: Craig (Guest) on June 10, 2008 at 06:30 PM
If it ever got to the point where we need to eliminate the minimum wage, we'd be better off just turning more to a socialist capitalism, like most of Europe. Then again, considering the trends over the past few decades, we are already, gradually heading for that destination anyway; albeit a lot slower than how Europe embraced the ideal.
I'd much rather we do that than let the poor be exploited similar to the Industrial Age or, even worse, China.
Posted By: Xenodias (Guest) on June 10, 2008 at 08:22 PM
Unemployment is up but when I look at all the high paying jobs posted online (& yes low paying) I just cant help but think many people dont realize the number of employers hiring and the salaries they are offering...not minimum wage either:
Posted By: timothy (Guest) on June 11, 2008 at 10:04 PM
To Timothy (guest):
Don't be such a jackass. How long do those jobs last on the web sites you listed? Less than a week! The job sites are crashing with eager applicants tying to get their resumes in first. Oh, there is NO unemployment in Bush's Texas, is there? So everybody else can go **** themselves. Clearly we need to TARGET the unemployment extension to high Unemployment states.
Or we can all work for minimum wage at Walmart. PLENTY of jobs there, right?
Posted By: John (Guest) on June 13, 2008 at 05:04 PM
Another example against the minimum wage: most workers make much, much more, and nothing other than market competition for skilled labor forces the employers to pay that much.
Entry-level work is meant to be just that: entry into the work force. Minimum-wage advocates treat it as a career and consequently eliminate incentives for advancement and further entrench the working poor, who would otherwise be much more liquid within free market mobility.
Posted By: Ian (Guest) on June 26, 2008 at 11:15 PM
Joe: “I think somebody needs to rethink their economics. Ask yourself this: Does it make any sense to increase the disparity between rich and poor? In that case, we should look to Latin America or Brazil for our economic model?”
We are, thanks to deeper government intrusion into free market activity to avoid the very thing its advocates fear.
“Its this disparity that is very much an issue, and goes back to my earlier point of corporate profiteering.”
This of course is fundamental socialist dogma: income gaps are cardinal sins, and Big Money is the cardinal devil. There is an absolute correlation disparity and centrism. Socialists hide the cavernous disparity of power between socialist government and the equality of incomes, and the former has a monumental effect on the latter, mainly the massive misdirection of material and talent. The enterprising soul, willing to survey the economic future, take serious risks, and be the vanguard of economic growth, need not bother when he can take a placid, menial job for just as much.
“I am very much aware that raising the min. wage can cause a problem for small business, but that is where the government comes in the help these businesses through tax breaks, instead of the current policy to extend this welfare to the biggest profiters like the oil companies.”
If government really wants to be a friend to small business, it can start by not manipulating them with higher taxes it can lower “to help them”. It can also eliminate capital gains taxes that have liquidated small businesses that can’t afford them, often with big business swooping in and buying the remains at fire sale prices. Do you see how big government and big business evolve into friends? Milton Friedman warned about this.
“It is only through a true living wage can the playing field be leveled, which would also boosst the economy.”
If the economy were left alone, that wage would appear. Why would business turn off masses of willing labor? If business resents paying a higher minimum wage, then why hire anyone at all?
“The more money people have, the more they can spend!”
Then where’s the virtue in stealing money from business and leave them able to spend less? Business spends on capital goods: the tools that make the economy grow and drive prices down with greater production. THEN the more people can BUY, which is far more important than what people can spend, because is the real measure of purchasing power.
Posted By: Ian (Guest) on June 27, 2008 at 12:07 AM
Joe: “Simple concept, seems to be missing from the article. As I said, I am not disputing the fact, simply the reasoning behind it. Would you accept a pay cut from your job while the owner makes more money, simply so that your job exists?”
This is absurd. If the point is saving my job, what does he accomplish by cutting my pay only to add the cut to his own pay? He will do that to redirect the money into something more profitable.
“It is our responsibility to help those who need it most, especially the
poor, and this isnt how you do it”
What are you voluntarily doing to help them, other than demanding that government (not you) steal from business (not you)?
Posted By: Ian (Guest) on June 27, 2008 at 12:08 AM
A quick economic argument to support the article: fiat wage increases move capital from the supply side to the demand side. This means less capital available for capital goods (machinery, factories, anything that earns money by creating goods), and more capital for consumer goods, the end product of capital goods. This helps the minimum wage worker...briefly.
Because what follows is price increases from the increased demand and a decrease in the rate of growth due to capital goods that couldn't be purchased. When you add excise taxes, regulation, and currency inflation to the mix, you start to understand why the minimum wage issue comes back every few years: all the inflations raise the living wage and cancel out the minimum wage increases.
The way to make the minimum wage count is to handle the living wage, and this means freeing production to create goods and lower prices. Fiat wage increases are a tax on the supply side, and attacks on the supply side increase prices by stunting supply, just as fiat wage increases increase prices by stimulating demand.
Conventional wisdom really needs to rethink its belief in demand-side economic stimulation: its sudden increase reduces the incentive to save, limiting the available investment capital that stimulates the supply side, increases prices, and doesn’t even stimulate. A stimulated economy means a stimulated supply side. Demand simply completes the circle by realizing the rate of return for which the supply side has already paid. And the sudden increase in prices actually reduces its rate of return. The result is an artificial boom that accelerates the business cycle.
Posted By: Ian (Guest) on June 27, 2008 at 01:48 AM
Considering that you can't even pay bills with the new minimum wage, both sides of this argument fail.
Posted By: NPA (Guest) on August 08, 2008 at 09:23 AM
u know what makes the most sense , why dont we take some off the top and give it to the bottom... hmmm that would make too much sense...
Posted By: u know (Guest) on August 23, 2008 at 08:59 AM
Saying that raising the minimum wage raises unemployment is a complete fallacy, spread by greedy business leaders who want to hang onto every penny they can. Take the UK for example, when the minimum wage was brought in there in the late 90's business leaders were up in arms and claimed thatit would only hurt the poor and that jobs would be cut. This turned out to be complete rubbish, as not only did unemployment fall dramatically, economic and manfacturing output both increased. This is for two simple reasons. Firstly the work still needs doing so people will still get hired to do it. Businesses aren't going to risk there company by not having enough staff to run it. And secondly the low paid spend a much higher proportion of their wage than the rich do. So by moving money from a small number of people who won't be spending it, to a much larger number of people who'll spend most of it. You will be aiding the ecomony as spending will increase, businesses can therefore expand and unemployment falls. Thus everyone benefits. Of course there is an optimum point for the minimum wage, it can't be astronomical, but it certainly should be higher than 5.15
Posted By: Sabre (Guest) on September 02, 2008 at 04:45 PM
I am a small business owner in Canada and would like to echo the statements of the author.
Our min wage rose to $8.75 this year, and will be up to $9.50 in 2009, and $10.25 this year. Our dollar is on par with the US dollar.
Not only does this raise mean I have fewer opportunities to employ more staff, but it means I - and most other business owners - will have to raise prices, again hurting the poor people who can't afford that much to begin with.
Posted By: Rob (Guest) on September 11, 2008 at 09:01 PM
Rob,
Thank you for your insight. This is really how it affects your everyday business. Higher taxes, min wage laws, tariffs always end up hurting the consumer, which is you! Why don't we listen to economists about the economy? Reagan ran a great economy his first four years and guess what? He won 49 states the next election. All but DC (which is full of morons) and the opponents home state of Minnesota and he barely lost that one.
Every time we print money (inflation tax on the poor), raise tariffs (tax on the consumer, which mostly hurts the poor), raise minimum wage (hurts the daily unskilled worker=poor, and the consumer, which mostly hurts the poor again), and raise taxes on businesses( which hurts the consumer, please take an Econ class), we lose! So do poor people, who continually buy into these ideas.
Posted By: Jon Paul (Guest) on September 16, 2008 at 02:02 AM
Can I ask what qualifications you have in Economics, because your argument sounds more political then economics. There are both sides - but time and time again it has been shown that NMW does not increase unemployment.
Posted By: Harry (Guest) on September 22, 2008 at 03:04 PM
Incredible. So, if I'm too understand this correctly, a minimum wage increase actually increases unemployment because companies can't afford to hire/retain workers? This is that same minimum wage that hasn't come close to keeping up with cost of living increases and inflation, right?
And, if I'm also understanding this correctly, the same financial bind that this puts companies in doesn't exist when managers, CEO's, etc. have these increases?
Oh, NOW I see.
-And to Small Business Rob: it's a business expense. You pay for gas, you pay for transport, you probably pay for advertising. Prices increase on everything.
Posted By: Alyaz (Guest) on November 04, 2008 at 12:22 PM
Well, with inflation the minimum wage was at the lowest it had been in terms of actual buying power. So it makes sense to periodically raise the minimum wage against the rate of inflation. Other business expenses raise with inflation, so I don't think raising wages with inflation once every ten years is an unreasonable expense for businesses to pay.
Posted By: Ken B (Guest) on December 28, 2008 at 10:24 AM
STAY CURRENT