By Jacob C. Maichel
-Economist Walter Williams
Minimum wage laws are likely some of the most misguided public policies that exist in the United States. I am incredibly sympathetic to the plight of the poor, but supporting a government mandated price fixing scheme not only creates distinct winners and losers but promotes very perverse outcomes for many vulnerable groups. Furthermore, the idea that a minimum wage is the key to lifting people of out poverty is clearly a logical fallacy. Why not make it law that everyone must be paid no less than $2,000 an hour? Then everyone would make over $4,000,000 annually and poverty would be abolished, right? Well no, instead the only people who would remain employed are those who create at least $2,000 of value an hour for their employer, a small fraction of the workforce. For businesses to be able to support this ludicrous minimum wage they would have to significantly reduce the workforce, likely with large increases in automation. Although the U.S. federal minimum wage is not $2,000, but instead $7.25, these artificially inflated wages do raise the incomes of some low skilled workers at the expense of eliminating the income for all who can not find work as a result.
Generally I think people who advocate for minimum wage laws mean well but likely have a fundamental misunderstanding of the topic. Pleas for a living wage are not new by any means. Saint Thomas Aquinas believed that commodities (farm products) should demand a fair price and workers should be paid a sufficient income to support themselves. In this time period, however, this was unachievable as the majority of people lived very minimally and often survived off of their own food production. The idea of a "just wage" or "living wage" really gained a resurgence of popularity during the industrial revolution. Social reformers of the time believed that it would be more beneficial for children to be in school, rather than working for low wages in dangerous conditions. This belief led to the creation of the first minimum wage laws in the country.
In 1912 Massachusetts passed the first minimum wage laws the U.S. had ever seen, although they were only pertinent to women and children. This was largely in response to a fear that unskilled workers who were payed low wages were taking the jobs of adult men. The idea behind the law was that by forcing employers to pay unskilled workers similar wages to skilled workers employers would opt for the latter, protecting the working man from competition. Many states followed Massachusetts' example, but these laws were shortly lived as the United States Supreme Court ruled them unconstitutional for violating the principle of freedom of contract. The repeal of these laws was largely ignored as the country prospered in the 1920s. High demand for workers coupled with tightened immigration allowed for competition within the market to allow wages and working conditions to naturally improve with no coercion from outside forces.
In 1929 the unemployment rate in the U.S. was roughly 3.14% compared 24.75% in 1933. As wages across the nation began to decrease the desire for a guaranteed minimum wage again resurged. Unfortunately, the underlying ideology for the justification of the laws seemed to shift from getting children out of the workforce to instead guaranteeing a "living wage" to those who were employed. What is misunderstood about this situation is that even though many with jobs were making less, if wages remained where they had been in the 1920s many more people would have been without a job. In 1933 the New Deal's National Industrial Recovery Act (NIRA) promised a minimum wage. This was largely a failure as it only increased the wages of unskilled workers, who already struggled to find gainful employment, not the wages of skilled workers who already were paid above the minimum wage. Rather than stimulating recovery, it appears to have made it harder for unskilled laborers to find work. The NIRA lasted only two years before it was deemed unconstitutional as well in 1935. It was replaced by the Fair Labor Standards Act in 1938 and since then the U.S. has had a minimum wage.
The Fair Labor Standards Act did not impact the labor market in a significant manner. Once the U.S. began to militarize in the 1940s the wartime economy increased wages far above the minimum wage. It remained this way until 1956 when Congress significantly increased the minimum wage and authorized the U.S. Department of Labor to conduct surveys to increase compliance amongst employers. Teenagers have always had higher unemployment than adults but after 1956 there was an incredible proliferation in teen unemployment, illustrated in the graph below.
Teenagers typically have the least amount of marketable skills other than the unique value they possess of being able to work for low wages. Without this advantage many lost their jobs to more skilled laborers in the short term and the long term impact of automation is starting to be realized more and more.
Perhaps more alarming is the power these minimum wage laws grant employers to discriminate in hiring. As wages increase and businesses reduce their workforce, this creates a surplus of individuals looking for employment. Economist Thomas Hall in Aftermath: The Unintended Consequences of Public Policies explains very clearly that discrimination is very difficult when the amount of applicants is similar to the amount of job vacancies determined by the market. As this surplus increases it empowers employers to increasingly choose employees based on personal preferences, including race. Historically, black teens have had a higher unemployment than their white counterparts but after the 1956 wage increases it became exceedingly worse. This can be seen in the following graph depicting the difference in unemployment rates in black and white teenagers before and after the 1956 wage increases.
It is hard to deny that minimum wage laws are clearly government-mandated price fixing schemes that create distinct winners and losers. It's ironic that labor unions and politicians that call for higher minimum wage laws forget why they were enacted in the first place; to force unskilled laborers (largely children) out of the workplace. This has greatly impacted the most vulnerable groups of workers, namely teenagers, and steals valuable experience they need to be successful in gaining future work. Although many people who support these laws have good motives, the road to hell is surely paved with good intentions. Supporting these laws seem good in theory but in practice they not only promote a slew of dangerous outcomes, but can explicitly allow racist hiring behavior.
Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University
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