Here’s and interesting thought/question: Does the minimum wage lead to a zero wage?
Steve Chapman writes on reason.com that “It would be nice if every worker were worth $9.80 an hour. But not all workers are.”
Unemployment remains high; job growth is sluggish; and millions of Americans have given up hope of ever finding work. So how do creative legislators propose to generate new hiring? Easy: Make it more expensive.
That’s right. In Congress and several states, some lawmakers want to increase the legally mandated minimum wage. They think employers should have to pay more for labor. They say it should be illegal to hire people who are willing to work cheap.
This amounts to a stubborn defiance of simple reality. A recession puts strong downward pressure on wages and salaries. A slow recovery has the same effect, only milder. It’s an unfortunate consequence of a weak economy.
You can’t blame anyone for wanting incomes to grow. But trying to achieve that in this manner is like trying to start a campfire by aiming a hose at a swimming pool.
It would be nice if every worker were worth $9.80 an hour. But not all workers are. If you tell a company it has to pay $9.80 to someone who produces only $7.50 in value, the company may choose to pay that employee an even lower wage: zero.
So does raising the minimum wage, or even having one altogether, cause some potential wage-earners to be priced out of the market?
I tend to agree with Mr. Chapman here. With true unemployment as high as it is, the fools want to do what they do best: be fools.
James Pethokoukis writes on The Enterprise Blog:
Even if it were a legit number, the 8.3% February unemployment rate, released today by the Labor Department, would be simply terrible—and unacceptable. It would still extend the longest streak of 8%-plus unemployment since the Great Depression. The U.S. economy hasn’t been below 8% unemployment since Obama took office in January 2009. And back in May 2007, unemployment was just 4.4%.
But, unfortunately, the true measure of U.S. unemployment is much, much worse.
He goes on to list unemployment rates using various models, ranging from 9.5% to 14.9%. John Hayward even notes on Human Events:
What is the current percentage of working-age Americans, eligible to participate in the civilian labor force, but not currently working? Answer: 36.3 percent.
Everybody wants to throw a tantrum about the big bad businesses that want to take advantage of their workers and pay them squat. I’m not saying they don’t exist. But what I am saying is consider this: Let’s say you have a fast food chain, who pays their workers minimum wage. Now let’s say that chain has 30 employees. Minimum wage was just increased by 35%, so you have three choices: You can fire 11 employees, you can increase your $1 hamburger to $1.35, or you can accept even narrower margins after a 35% increase in employee wages (which are arguably the highest cost of running any business).
“The choice is easy!” you say. Just go ahead and add that $0.35 to the hamburger, I mean after all, it’s not that much.
But now that creates an interesting problem – You just increased your customers’ food costs by 35%. Phrased another way, your customers now spend 35% more on food. Now they have three choices to make: Eat 35% less (order two hamburgers instead of three), shop somewhere else, or accept the 35% increase in their food costs, and cut spending elsewhere.
As you can see, what seems to be something completely innocent and benevolent, such as raising the minimum wage, has a domino effect.
The most likely scenario will be a combination of the three; That is, the business will simultaneously cut staff, raise prices, and eat the increase, with small measures of each totaling the 35%. But let’s assume for the sake of argument the business decides that it can do without the 11 employees (after all, three of them are on “break” more than they should be, one moves slower than molasses, you plain just don’t like a few of the others, etc). So the wages increase for 19 people, but for 11 people, their wages decrease to zero. Rephrased, the 35% increase for 19 people amounts to a 100% decrease for 11. How is this good?
For those who know me, you know I’m opposed to the minimum wage. Employment is a private contract between the employer and the employee. Government makes it illegal for the employer to offer wages below their “minimum.” This could cause the employer to reconsider employing workers, utilizing existing resources even more.
But never mind any of that. Businesses exist solely to exploit their workers, right? Ahem… do you know what your government is doing?
Art Cashin – Too Good Not To Pass Along
In his latest Gartman newsletter, Dennis cites historians, Will and Ariel Durant, on the decline of the Roman Empire.
Rome had its socialist interlude under Diocletian. Faced with increasing poverty and restlessness among the masses, and with the imminent danger of barbarian invasion, he issued in A.D. 3 an edictum de pretiis, which denounced monopolists for keeping goods from the market to raise prices, and set maximum prices and wages for all important articles and services. Extensive public works were undertaken to put the unemployed to work, and food was distributed gratis, or at reduced prices, to the poor. The government – which already owned most mines, quarries, and salt deposits – brought nearly all major industries and guilds under detailed control. “In every large town,” we are told, “the state became a powerful employer, standing head and shoulders above the private industrialists, who were in any case crushed by taxation.” When businessmen predicted ruin, Diocletian explained that the barbarians were at the gate, and that individual liberty had to be shelved until collective liberty could be made secure. The socialism of Diocletian was a war economy, made possible by fear of foreign attack. Other factors equal, internal liberty varies inversely with external danger.
The task of controlling men in economic detail proved too much for Diocletian’s expanding, expensive, and corrupt bureaucracy. To support this officialdom – the army, the courts, public works, and the dole – taxation rose to such heights that people lost the incentive to work or earn, and an erosive contest began between lawyers finding devices to evade taxes and lawyers formulating laws to prevent evasion. Thousands of Romans, to escape the tax gatherer, fled over the frontiers to seek refuge among the barbarians. Seeking to check this elusive mobility and to facilitate regulation and taxation, the government issued decrees binding the peasant to his field and the worker to his shop until all their debts and taxes had been paid. In this and other ways medieval serfdom began.
Read it. Put it down. Pick it up and reread it again. Repeat several times. There are many lessons here, many important lessons. (We think the date, however, is a typo. Diocletian ruled from 284 to 305)