Guest Post: Welfare, Minimum Wages, And Unemployment

Tyler Durden's picture

Submitted by Greg Morin via the Ludwig von Mises Institute,

Of the various flavors of government interventionism in our lives, the minimum wage is perhaps the most welcomed. It appeals not only to our innate sense of “fairness” but also to our self-interest. Its allure may erroneously lead us to the conclusion that because “it is popular,” ergo “it is right.”

The more astute proponents of the minimum wage, however, immediately point to the obvious; namely, that an extreme minimum wage ($1,000 per hour) would be unequivocally detrimental. However, the proponents quickly turn to dismissing this fear by asserting that, empirically, no such job loss occurs when the minimum wage is slowly raised. This is akin to arguing that although fire can boil water, a small fire won’t heat it up. The support for this assertion is the oft-cited 1994 study by Card and Krueger showing a positive correlation between an increased minimum wage and employment in New Jersey. Many others have thoroughly debunked this study and it is significant that the original authors eventually retracted their claims.

Youth and Entry-Level Unemployment

The problem with such “studies” that purport to demonstrate only positive and no negative effects from a rising minimum wage is that it is quite easy to count individuals whose pay went up. What is more challenging, if not impossible, is to count the people that would have been hired but were not. Likewise, offsetting reductions in non-monetary compensation will not show up in a monetarily-focused analysis.

However, empirical economic data is not entirely useless. Such data is more suited to qualitative rather than quantitative predictions (who is affected rather than how much they are affected). For example, basic economics predicts that a minimum wage will necessarily increase unemployment among those with the least experience. Indeed, if we look at the empirical evidence we see exactly that. Looking at the data from the Bureau of Labor Statistics we find that the unemployment rate (June 2013) among 16-19 year olds is 24 percent and among 20-24 year olds it is 14 percent. These values far exceed the unemployment rate (6 percent) of those workers with sufficient experience and skills to make them largely immune to minimum wage pay scales, namely 25-54 year olds. People whose productive value is less than the minimum wage are de facto unemployable. They are denied the opportunity to gain experience and skills, and their exclusion from the job market is a net loss to society.

The minimum wage is just another weapon in the arsenal of the misguided progressive trying to “help” the poor. Their mistake in wielding this weapon is in presuming all workers are similarly situated; i.e., that the vast majority of hourly employees earn minimum wage and that they are uniformly composed of heads of households. In fact the opposite is true. Only 2.1 percent of hourly employees earn minimum wage and of that number over half (55 percent) are 16-24 years old.

How Welfare Brings Down the Asking Wage

So, we know that a sizable number of minimum-wage earners are not in need of a wage that can support a household. But what of the minimum-wage earners who are? We are told repeatedly that minimum wage is not a living wage, so why are not more minimum wage earners simply starving to death? In reality workers earn two wages: one from their employer and one from the state. For example, someone making the current full-time minimum wage earns $15,000 per year, but they are also eligible for additional government benefits that bring their total remuneration to approximately $35,000 per year if they are childless, or up to $52,000 year if they have children. In fact, earning more does not necessarily help one wean himself off this state sponsored support. As wages rise assistance can often decline so precipitously that even earning $1 more can mean a loss of thousands of dollars in aid. This creates a disincentive for the worker to improve and earn more; the perverse incentive here is that we are rewarding the very thing we are trying to eliminate (low wages). These wage subsidies serve only to pervert the normal incentives present in an exchange between employer and employee. Both the employer and the employee are aware of the subsidies, so each is willing to offer less and accept less rather than demand more and offer more.

At first blush one might conclude the employer is making out like a bandit. But there is no free lunch — the subsidies have to come from somewhere. Taxes fund these subsidies. So the employer is not necessarily paying less if its taxes fund the very subsidies its employees are receiving. In fact many employers pay more on net. All employers pay taxes, but only some receive the benefit of subsidized wages. This is a net redistribution from one class of company to another. In essence we are forcing high wage companies to pay low wage companies to keep their wages low.

The Minimum Wage Reduces Worker Productivity

So considering that it is established that minimum wage laws and other forms of wage subsidization are detrimental to the stated goal of improving conditions for those regarded as poor, we must address the question perennially proffered by those who believe one’s salvation can only come via the state: “If not the minimum wage, what then can increase wages?” To answer this question we must understand there are only two possible routes to improving our wages/standard of living. The first method is the unethical route of using force (government) to extract what we want.

The second method, however, is what every rational person would be left with were there no state influence corrupting the incentives that drive their decision-making: improve or augment one’s skills so that they align with those skills currently in greater demand.

Self-improvement through education and/or work experience is the answer to the question: how do I earn more? Government sponsored interference in the market that results in fewer people gaining experience can only serve to frustrate one’s ability to engage in self-improvement. Elimination of the minimum wage is a necessary, although insufficient, first step to improving the economic value of the inexperienced or unskilled.

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LetThemEatRand's picture

As usual, you got a lot of it right right up until the proposed solution.  How does self-improvement through education and/or work experience get a guy ahead in a world where a few people control most of the world's wealth by inheritance?  Where the international system of trade encourages companies to build factories in countries with autocratic governments that keep their people in a subsistence existence?  Take the money back that was stolen, and then we can talk about building a new system on a level playing field where individual merit is rewarded and workers can bargain freely without fear of losing their jobs to a slave ship country.  Until then, the minimum wage/welfare debate is nothing more than a giant distraction from the elephant in the room that is oligarch control of the world and the intentional conversion of the West into a land of serfs and beggars.

knukles's picture

At least the poor and downtrodden get the appropriate social and sexual welfare ... 
Skateboarder's picture

Kind of hard to justify low-performance tenured professors, 4x inflated tuitions ('03-'13) for four years of basic prerequisite knowledge without any field experience, additional two-year tracks for certification of basic field knowledge (certification only - actual field knowledge not guaranteed), and further seven-year tracks for esteemed certification of field knowledge (certification only - actual field knowledge not guaranteed), all the while working for and yielding all work to your masters.

This college thing and 'education' seem like a bad idea to me.

Too bad knowledge is considered invalid without certification in most circles still.

edit: knuks, no way!

Spastica Rex's picture

Education /= Training /= Certification

Big money in the control of credentials, however. It's really just a different flavor of insurance.

kaiserhoff's picture

Paying gubbermint workers no more than minimum wage would correct a multitude of sins.

James_Cole's picture

Government sponsored interference in the market that results in fewer people gaining experience can only serve to frustrate one’s ability to engage in self-improvement. Elimination of the minimum wage is a necessary, although insufficient, first step to improving the economic value of the inexperienced or unskilled.

Government is the fucking market, for fucks sake. This article is moronic, talk to some rich people and learn how the game actually works. All this moronic shit about 'market dictates' blah blah, aren't people sick of this tripe yet?

Minimum wage is one of the very few ways the peons can fight back against their masters. Commodities are priced GLOBALLY, get it? 

AldousHuxley's picture

welfare = cost of staying in power for political class.


fake food + sports on TV keep them from leaving the factory.

Got Superbowl + winter olympics lined up.

gallistic's picture

Cole, you are right on target. It never ceases to amaze me how people vote against their own self interest. A serious body of work has developed trying to explain why this is. It is a serious conversation that is past due on the national agenda.

It is tragically hilarious to see "free" and working men who do all the work, throw themselves to their knees and suck the semen out of some "corporate personhood". In my personal view, it is a sad form of neo-feudalism.

Please, oh pretty please, give me less money, so the net profits can break a new record and your stock options and bonuses will rise accordingly. Yes!, yes!, let it "trickle down" into my mouth...

By the way, I have had enough of this bullshit "Austrian Economics" crap. They are the worst breed of academic utopians. A few of their ideas have merit, but taken as a whole, their theoretical blinders do not allow them to see the world as it is, and they are seriously detached from the real world.

They are zealots who defend their dead messiah's economic theology and live in a fantasy laissez-faire world where Smith's cold and dead, mythic, and absolutely "invisible hand" will guide them to economic nirvana or whatever...

PT's picture

What better way to motivate a President / congress than to ensure that they are no richer than the poorest worker?

Yenbot's picture

Hear hear, Kaiserhoff!! The motion is seconded!! To the People with it!!

caShOnlY's picture

Education /= Training /= Certification

create a "in the club" mind set.  "we paid our dues, your pay yours" idealism.   Then education is no longer about "smarts" but about "paying the loan" that gives the degree.

i_call_you_my_base's picture

"Kind of hard to justify low-performance tenured professors"

Kind of hard to assess their performance. Most professors don't teach many classes, don't interact with students, grade papers / projects, etc. That's left to the slave labor (graduate students).

chinoslims's picture

that's worse than indentured servitude.  at least there was a timeline for the servitude.  what is the timeline for debt that can't be written off for an education that offers very few jobs upon graduation.


kaiserhoff's picture

Funny as hell, knuks.

and probably cumming with EBT cards soon..., because Obama.

How do you find this stuff?  Friends at the SEC?

G.O.O.D's picture

Omg that is way too fvked up knucks

StychoKiller's picture

All right Knuks!  That's some compassionate conservatism right there!  All you Progressive-Socialists take note:  Knukles has thrown down the (latex) gauntlet and demands that you prove your willingness to give your fellow man a hand!

Canoe Driver's picture

Agreed, LTER. The author also omits that his premise depends on a limited supply of workers. The value of skills and experience plunges when the labor market is flooded with job applicants. This turns out to be true even for highly skilled workers, e.g., engineers, lawyers, etc., but is certainly most damaging to the lowest paid workers. 

StychoKiller's picture

"If they're going to die, they'd better do it and remove the surplus population!"

billwilson's picture

More lunacy from the moron.

We live in a society. Not all have equal abilities or desires or capabilities. Yet it is in everyone's best interest to have a harmonious society and not one where it is winner take all. That means sharing, and that means a form of government redistribution. Otherwise ... you get to the point where it is "off with their heads". 

The free enterprisers are wrong. More education is not only the answer, especially if it comes from private schools and more debt, and corpratized education.

As for minimum wages .... Canada is +$10/hr, Australia around +$15 ... and they have lower unemployment rates than in the US ... and folks don't have to pay extra for health care like in the US, so they get to keep more of their money too. Only the US is living in the dark ages..  




Suisse's picture

Australia has a minimum wage with a stepping system and both of these countries have EXPORT DRIVEN ECONOMIES. 

The_Prisoner's picture

Australia has 5 million people on welfare. That is nearly 25% of the total population.

There is a difference between being an export driven economy of commodities versus industrialised goods.

Industry in Australia is gone. It cannot compete due to rising labour and energy costs. Car industry, aluminium smelters, steel mills, oil refineries, you name it... all gone.

Harry Dong's picture

As compared to nearly 50% here in 'Merica?

I'd rather see my local McD worker gettin 20 an hour and not having to live on food stamps, wouldn't you agree? It'll cost you 70 cents more a big Mac...are you too niggardly to chip in that?

i_call_you_my_base's picture

I think the problem is that many people who work for minimum wage eat at McDonald's. People who can afford to pay more don't really eat there. The increased costs will be absorbed by lower-wage earners.

Trucker Glock's picture

The problem is an economy where adults with children work jobs that high schoolers should be doing for beer and gas money.

Canoe Driver's picture

Then they will eat less. Or perhaps cook their own food. No problem either way, might even lose some weight. There is an obesity problem, and it preferentially afflicts the lower classes. Basically, fast food should probably be taxed like cigarettes. Let's face it.

stacking12321's picture

no, fast food should not be taxed, and neither should anything else be.

doesn't matter that most fast food is crap and unhealthy.

what matters is a principle of basic liberty - who gets to decide what's good food and what's not?

do you want some corrupt washington bureaucrat deciding for you?

let people live their own lives and make their own decisions.

StychoKiller's picture

Well, WHY are they not "deciding" to live without handouts from the Govt?

stacking12321's picture

maybe because when you give someone something for free, they often accept it?

that wasn't too hard to figure out now, was it?

doesn't mean it's right, though, to take money by force from people who work for a living, and give it away to others.


Canoe Driver's picture

Fast food is a vice. It is an indulgence, not a staple of diet, and universally considered destructive to human health. Now, what would happen if all taxes were removed from alcohol, cigarettes, and other such comestibles?  Their use would increase, and government revenue would drop significantly.  Next, the healthcare burden on government would, in dollar terms, skyrocket.

Thus, you propose a recipe for gross exacerbation of the ongoing national bankruptcy. 

Now, if people want complete self-determination, great, but you would need to completely eliminate government participation in healthcare, welfare, social security, etc, i.e., government would need to have no fiscal interest in your health and well-being at all. Since that won't happen, government has to discourage unhealthy behavior. It is one of the few valid uses of government authority IF a welfare state is a foregone conclusion, since some people are hopelessly self-destructive. 

stacking12321's picture

a vice? perhaps, but that's just an opinion. who gets to decide what's a vice? how about what tv shows you watch, what books you read? how you spend your free time? what religion you believe in? do you really think someone else should be making decisions for you as to what's a vice and what's not?

there should be no healthcare burden on government.

government interference in the sick-care (aka "healthcare") industry is the main reason it's so expensive in the first place. obvious solution: get rid of the government.

"Since that won't happen, government has to discourage unhealthy behavior. It is one of the few valid uses of government authority IF a welfare state is a foregone conclusion, since some people are hopelessly self-destructive. "

government is the use of coercion (violence) - it is never valid for a man to use force or threat of force to intimidate others into doing or not doing something, so long as that other person isn't infringing on the rights of anyone.

"Since that won't happen"...there was a time that people said that about slavery, as well. eventually people realized it wasn't right and ended the practice. so it will be with government. that's not to say we can't organize and work together, but it must be voluntary, not forced on anyone, that's the key.


G.O.O.D's picture

If you eat Mccrap you have brain rot and should never post here.

PhilofOz's picture

Bullshit! Just today, Abbott and co having a bitch that nearly 20% of the Australian population are on some type of welfare and it must come down, which I know from people around me has started weeks ago with their slash and burn policies. Under 20& is not 25%.

rbg81's picture

What I get from this article is that the Government disincentives are the problem, not the minimum wage.

LetThemEatRand's picture

He does have the part right about welfare being a subsidy to corporations that allows the minimum wage worker to survive and remain in his/her situation, though he completely misses the fact that this is deliberate on the part of the big corporations.  Like most pure free market proponents, he urges a free market in a world where the game is already irretrievably rigged in favor of those who inherited their wealth from generations ago and/or who derived their wealth from exploiting a corrupt system.

BigJim's picture

Regardless of the corrupt and oligarchic system we find ourselves in, the argument against minimum wage still stands. It makes the poorer-skilled unemployable.

I would agree, though, that in a society where people do not pay a mark-to-market rate to everyone else in the polity for the privilege of monopolising natural resources, the poor are irrevocably fucked without some kind of welfare system.

tickhound's picture

Can't.. find.. way.. to shove.. square.peg.into.round.hole.

Ultimately, we're all "unemployable." So ultimately, doesn't humanity win?

Change the premise. Humanity can handle it.

Yenbot's picture

Profound. Most people don't see far enough ahead to say such things, or think them. We in the West are also all "the little old man with the cane" if we're unlucky enough to live that long. Or when we're the recipient of the accident/illness of the week award.

PT's picture

No, the minimum wage is supposed to be a minimum.  The highly skilled workers are supposed to be paid more.  The fact that highly skilled workers have no leverage says all you need to know about the minimum wage.

But the elephant in the room is, as always, the price of real estate, be it the mortgage on the cheapest house in the cheapest suburb or the price of the land on which the supermarket is built where the minimum wage worker buys his food.

Where are all the builders building cheap houses to accommodate the cheap workers?  Our technology allows us to have a cheap everything except a cheap house?  How convenient!  How can we compete with the foreign labourer on $50 per week when the cheapest rent is $300 per week?  Sleep on the factory floor?  That'll do wonders for demand. 

1990 decent house in decent suburb $85000 = $136 per week out of $290 per week minimum wage (after tax) = 47%
2014 cheapest house cheapest suburb $250000 = $400 per week out of $500 per week minimum wage = 80%

Tell me again, what is fucking up the economy????????

Canoe Driver's picture

If it makes them less likely to be employed, that is not an argument for pathetic wages. People seem to forget that the employer will not be able to legally find employees who will work for less, that's why it is a "minimum" wage. Therefore, he will have to increase the workload on other employees, which is only plausible to a point, or simply hire and raise prices.

This is why ALL labor pay increases are INFLATIONARY. There is NEVER a NET gain by labor, unless it is through increased efficiency or decreasing supply of labor itself. This reality in turn means that employment itself is over-utilized in our present culture, in that it probably only makes sense for gaining skills and experience, during which time an individual sacrifices net financial gain to benefit from training and to build skills. Every capable member of the workforce therefore should target being a partner in a business at some point. The ones who can't do so will pay the price of economic stagnation, and it is this cohort who are the proper object of compensatory and limited government assistance. 

Therefore I submit that the conversion of 99% of the people to an expectation of a lifetime of labor without equity is problem number one.

GernB's picture

Free enterprise is letting consumers decide what labor is worth to them. Freedom is not freedom from the pressures of life, because that only happens by saddling someone else with responsibility for your need to feed yourself, cloth yourself, shelter yourself, and provide your health care. Living in a society with someone else shouldn't be a license to take their time by confiscating their resources. How many years of someone's life is it fair to take in the form of taxes to pay for someone elses free stuff?

PT's picture

First gimme some honesty in the price of real estate before we worry about the other stuff because the other stuff is currently insignificant.  We could easily compete with foreign manufacturers, if only we paid our workers ten cents per week.  Which they would happily work for if their mortgage was only one cent per week.

We're being crushed between foreign labour prices and local real estate prices.  That is the real problem. 

PT's picture

Will real estate prices ever go down?  You know, to reflect the true value of the real estate.

EDIT:  "True value" meaning "the productive capacity", NOT "the amount lent to idiots in order to bid up the price, with no attention paid to the ability to repay" 

LetThemEatRand's picture

So if I inherit a billion dollars from my family that ruled by force and stole their wealth a few generations ago, I'm cool then?  And that's not freeloading but rather keeping what my ancestors stole fair and square?  And if I fund a politician to write laws that allow me to make a billion "legally" by inflating away the purchasing power of the middle class, I'm cool because I didn't break any laws that I wrote for said politician?  My transfer of wealth from the middle class to me is not "saddling someone else with responsibility for my need to Bentley myself?"

cynicalskeptic's picture

Behind every great fortune lies a great crime.

Honore de Balzac

just because generations pass, it does not mean the crime was not committed

artless's picture


So you are saying that everyone with a billion large did just that? No one aquired their wealth morally or honorably?


Perhaps had we lived in a more liberty based society that did not allow the use of government force or coercion as a tool of the wicked to exist we might not have the hypothetical example you cite. Are you referring or alluding to a particular figure either present day or from history?

Guys like you always like to reference Henry Ford and cite his high wage policy as an example. Did Ford acquire his wealth in the way you suggest? And by what claim does anyone have on that wealth once he died. Does he not have the right to do with it as he chooses? Is it not his property?

In light of that do you propose that all wealth in death be confiscated by the state or society? Would you include the wealth of the recently deceased Robert Wilson? The guy whop CHOSE to give away his 600 million to various charities, foundations, etc? Or were these entities not to yopur liking?

Your logic is a circular firing squad. You want to right the wrongs of the oligarch/political/ruling class by giving the wealth of private citizens to the oligarch/political/ruling class.


PT's picture

Australia's minimum wage could have been worth something if it had have been able to keep up with the minimum price of real estate.

What the govt gives, the bankster takes double. 

PT's picture

... unless it is a "First Home Buyers' Grant", in which case the banksters take tenfold or twentyfold.