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Guest Post: The Minimum Wage Forces Low-Skill Workers To Compete With Higher-Skill Workers
Submitted by George Reisman via the Ludwig von Mises Institute,
The efforts underway by the Service Employees International Union, and its political and media allies, to raise the minimum wage from $7.25 to $15 per hour would, if successful, cause major unemployment among low-skilled workers, who are the supposed beneficiaries of those efforts.
The reason is not only the fact that higher wages serve to raise costs of production and thus prices, which in turn serves to reduce physical sales volume and thus the number of workers needed. There is also another equally, if not more important reason in this case, and it is a reason which is only very inadequately described by reference to the substitution of machinery or automation for the direct labor of workers when wages are increased.
This is the fact that a low wage constitutes a competitive advantage for less-skilled workers that serves to protect them from competition from more-skilled workers. In other words, a wage of $7.25 per hour for fast-food workers serves to protect those workers from competition from workers able to earn $8 to $15 per hour in other lines of work. The workers able to earn these higher wage rates are not interested in seeking employment at the lower wage rates of the fast-food workers.
But if the wage of the fast-food workers, and all other workers presently earning less than $15 per hour, is raised to $15 per hour, then these more capable workers can now earn as much as fast-food workers as they can in any of the occupations in which they had been working up to now.
Moreover, the widespread rise in wage rates to $15 per hour will cause unemployment in all of the occupations affected. The unemployed clerks, telemarketers, factory workers, and whoever, who otherwise would have earned between $8 and $15 per hour, will have no reason not to apply for work in fast food, which will now pay as much as any other occupation that is open to them. And since those workers are more capable, it is overwhelmingly likely that to the extent that they do seek employment as fast-food workers, they will be preferred over the low-skilled workers who presently work in fast-food establishments. Thus, the rise in the wage of the fast-food workers will serve as an invitation to the competition of large numbers of workers who do not presently think of working as fast-food workers and who, being better qualified, will almost certainly take away their jobs.
Between less employment overall in the least-skilled lines of work such as fast food, and the incentive created for vastly increased competition for employment in those lines coming from more qualified workers, the effect could well be to close those lines altogether to the employment of workers at the low end of skill and ability. That, of course, would deprive these people of the opportunity to acquire skills and abilities from work experience that otherwise would have enabled them to become capable of performing more demanding jobs later on.
What the demand for a $15 an hour minimum wage represents is a case of low-skilled workers being led to reach for a high-wage “bird in the bush,” so to speak. Unfortunately, at the high wage, there are both fewer birds in the bush than are presently in hand and most or all of them will fly away into the hands of others, who possess greater skills and abilities, if the attempt is made to reach for them.
This must ultimately be the result even if somehow the present fast-food workers and the like could be enabled to keep their jobs for a time. Even so, practically every time that it became a question of hiring someone new, the new employees would almost certainly be drawn from the ranks of workers of greater skill and ability than those who had customarily been employed in these jobs. Thus, even if not immediately, in time there would simply be no more room in the economic system for workers at or near the bottom of the skills ladder.
No one can question the desirability of being able to earn $15 an hour rather than $7.25 an hour. Still more desirable would be the ability to earn $50 an hour instead of $15 an hour. However, it is necessary to know considerably more than this about economics before attempting to enact sweeping changes in economic policy, changes to be achieved by attempting to organize a mass movement that is based on nothing but a desire for economic improvement and no real knowledge whatever of how actually to achieve it.
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a 7.25 min. wage just means that the REAL cost of living is subsidized by the tax payer.....
After reading so many retarded comments that, no matter what their intent, equal shilling for the corporatocracy at the expenses of working people, I'm going to reconsider calling myself a libertarian. This "deregulate and everything will be awesome" pie in the sky Bullshit is beyond sophomoric. I'll say I'm an anarchist in principle and a liberty loving populist pragmatic realist. Dennis K>Ron P
The number #1 reason why a minimum wage law is destructive?
Wage-Price Inflation Spiral.
Inflation, of course, is too many dollars chasing too few goods.
If the least amount of income someone can make is $15 an hour, the price of housing (the most expensive fixed cost) and many other costs will simply increase to match that amount.
That's why it's more expensive to live in NYC than in Syracuse. Sure, more people want to live in one than the other, but it has been that way for centuries and most people that are born in NYC stay there their entire lives but what a fast food worker makes is much higher than in most other locations.
Again, it's rent or occupancy that is the most expensive component. If you live at home with your parents footing the majority of the bills, then your need for a living wage is not at issue between $7.25 & $15. It would be a bonanza to anyone without bills.
If you want to make things livable, start with finding ways to provide afforable and livable housing instead of starting with wages that inflation will only quickly erode.
the biggest issue is much more basic than anything like a theory about wage price inflation spiral.
the biggest issue is a very basic one, personal freedom - the freedom to live our lives free from government interference.
and if people want living to be "affordable", END THE FED! return to real money, gold & silver, not the fake IOU notes the fed prints by the trillions$, driving up prices everywhere.
Increase in minimum wage should create immediate inflation but does not automatically create a wage-price inflation spiral - the percent increase in wages is less than the percent increase in prices, therefore both producers and consumers are better off (as consumers can buy more, plus debt is proportionately less) until the system runs out of resources.
I can tell you right now, when I was on minimum wage I could not afford to study to advance myself. Now on higher wages, I often do courses to advance my skills. I could borrow money and start a business tomorrow. But given my lack of experience, that would be a dangerous thing to do. But on higher wages I could save up some money as a buffer, so I could borrow less money, have less risk, and absorb my own mistakes instead of getting investors to absorb my mistakes. You may be surprised how a minimum wage increase could increase production.
Agree with you 100% the biggest killer we have is real estate prices. All excess profit - be it business or wages - is chewed up by real estate, and then some. My biggest concern is that housing is unaffordable for minimum wage workers. But don't forget that the shops they go to all have rents and mortgages, which drive up the prices they must pay.
Because I don't trust government statistics I use my Big Mac index to measure real minimum wage and inflation. In 1977, 37 years and 120 lbs ago, I worked at McDonalds. Minimum wage was $2.25 and a Big Mac cost $.75. Conveniently minimum wage = 3 Big Macs. Today I paid $3.89 for a Big Mac. So minimum wage / Big Mac parity is 3 x $3.89 = $11.67.
and
$7.25 / 11.67 = 62%.
Yes, the minimum wage has lagged inflation time and again over the years. I earned the minimum wage of I think $3.25/hr the summer of 1983. I saw someone else post hear about the minimum wage being $1.25/hr in the early 1960's. Maybe it should be indexed to inflation? That comment will probably elicit some rants about official inflation rate.
The guy who wrote this piece must have never had to work for a living. It makes no sense to argue to keep minimum wages low to keeps them from acquiring skills,WTF? If people are willing to abandon these "skilled" jobs for a minimum wage job that pays higher, how good are these "skilled" jobs at the current pay to begin with? Maybe it would cause some upward pressure on the pay scale for the jobs that were abandoned. Better to have 10% unemployment than have 40% of the population working poor and collecting Gov. benefits anyway.
I'm no scholar, though I'm fairly well read in Hazlitt, Hayek, Menger, and the like, and I find this guest commentator's Rothbardian position quite specious in both its logic as well as its morality. Once one finds themselves outside the bounds of a free enterprise system and operating within the confines of a corporatist kakistocracy, one must discard all misconceptions as to the applicability of any number of axioms of the Austrian school. Additionally, the Austrian school doesn't dwell much on the behavioral economic corner cases where sizable segments of a population must choose between debt peonage, welfare, minimum wages, crime, revolution, or deprivation. Really all it can tell you is that you've already tread down a dark path, having cast civility into an economic scale, potentially towards a pillaged and dead end in history.
So while you guys sit around admiring yourselves for your eloquent first order predicate logic sophistry regarding the evils of a minimum wage, one hopes that you will reflect upon the fact that all this time, a far larger and more sinister con is being perpetrated on us all, and, unless you hold a seat on the board of the federal reserve bank of new york, you. are. the. mark. Priorities, gentlemen, strike the root of evil and the branches will wither.
Thank you for taking the time to write that. I agree and did not like something about the article. I think you nailed it.
"Priorities, gentlemen, strike the root of evil and the branches will wither."
and what exactly do you consider to be the root of evil?
i agree 100% that the federal reserve is the source of a great deal of the evil in this society, as well as their minions in the government.
and, it seems that we should be opposed to the government in all its forms, and all its attempts to control our lives in any way. we should reject government handouts, and withdraw our support of the government in any way, minimize or eliminate any taxes paid to the government. work outside their system whenever possible. save in gold, and silver, use bitcoin for transactions.
and, we should oppose all government initiatives and price controls, including minimum wage laws.
do you not agree?
You do understand don't you that no government=anarchy? Which I suspect is fine if you are young, dumb, full of cum, 9 foot tall and bullet proof.
Nobody should be able to dictate wages you pay your employees.
They come looking for a job and they agree to the pay, or not.
I'm sure glad I no longer live in the USA, and don't have to fuck with these damn rules.
Nobody should be able to tell you how to run your business.
I noticed when I first came to China in the mid 1980's that this was wild west capitalism, and the USA was ''National Socialism'', aka NAZISM.
I would never have a biz in the USA, and nor will I ever again.
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Having a debate about how other men should run their business, god damn and they call 'america' a 'free country', FREE to do what debate on the internet? That is your only freedom.
What did you do in the US to get deported?
You have a business in China? Do you have Chinese workers or some cheaper nation? Do you sell your stuff in China or US or somewhere else?
Need to work the basics here folks and step back.
First of all its your choice, you can be a business owner, or a wage slave.
If you choose to be a wage-slave, then you find exceptable wages.
If you choose to be a business-owner, then you have a budget, and you want to pay, but your restricted.
***
This fucking 'control' is the problem, all that has happened is that men say "FUCK IT", and do a JOHN-GALT, and shut down their biz, ... and in times there are fewer businesses to FUCK.
Eventually there are no jobs, and the Business owners are all gone, living happy elsewhere and the wage-slaves become members of the free shit army.
Sound's familiar? Welcome to america.
The last US business moves to China and then suddenly discovers that there are no more US customers. Where did they all go? Oh well, better start selling to the Chinese now.
Cheerios Nixes GMO fucking great.... what is mother monsanto going to do?
What a load of crap. This type of theoretical tripe works great in theoretical economies. But, sadly, no where else.
Actually, it doesn't even work in theoretical economies.
Please sir, can I have some more?
Economics 101
All this article does is apply 2. to the minumum wage.
If you want more examples, apply 1. to rent control, apply 5. to QE, apply 4. to the current US economy.