This is the beginning of series of posts that will discuss the unintended consequences of occurrences in our world. Most of these occurrences are very commonplace and as a result are very accepted. Even worse than being common, many of these occurrences at first glance appear to be good not only economically but morally. My intent (wink wink) is to cause be to rethink and analyze our world.
Let’s begin with a topic that has been on my mind a lot lately– minimum wage. The United States hasn’t always had a minimum wage. The Fair Labor Standards Act of 1938 establish minimum wage, among other things. The intent of politicians was to lessen unfair wages and to lift people out of poverty and propel them into the middle class. Since it’s inception, the minimum wage has been risen a number of times and lowered only once. This begs the question… should the middle class be earning minimum wage?
Minimum wage is a great example of unintended consequences and a broken political system. When you are thinking in term of politics and aesthetics, you are not thinking in terms of economics. Problems arise when politicians (or anyone in power) think about intentions over consequences, rhetoric over reality, and caring over thinking. It is a universal truth that just because you do something with good intentions, good is not guaranteed to happen from it. It is my belief that the minimum wage, while well-intentioned, is a counter-productive and services as a good example of the consequence of government interference the market.
I have always wondered why liberals don’t understand that increases in minimum wage cause inflation and therefore do not stimulate the economy. It would be like adding zeroes to the end of everyone’s bank account and claiming that were all richer. To maintain the same bottom line, companies offset the increase cost in labor with a proportional increase in sales price. The unintended consequence is a devaluation of the dollar. The graph below is a correlation between minimum wage (BLUE) and the value of a dollar compared to its 2009 value (RED). As it is clearly seen as minimum wage increases the value of the dollar decreases. The end result of increasing minimum wage is the devaluation of the dollar which leaves the intended beneficiaries in the same place while decreasing our global buying power and negatively impacting those of us that have worked hard to move up in the world.
Imagine a situation in which all a country’s citizens earned the minimun wage and there was full employment. If the government raised the minimum wage there would be no greater supply or quantity demanded for goods or services; therefore, no wealth has been created. People would have more money, but it would cost companies more to purchase the labor to produce goods and services. Thus, to companies will have to choose to either accept earning less income or raise prices. This example shows how minimum wage is increased by acts of Congress and decreased as inflation erodes purchasing power.
The most common concern of eliminating the minimum wage is that companies will be able consipire against their employees, forcing them to accept wages that amount to next to nothing. This sounds plausible, but it leaves out two key points:
1. Employees are not “forced” to work at a specific place
2. Competition between businesses will automatically lead to higher wages as they compete for the best labor
The idea that employees are forced into jobs and exploited for their labor is well represented by the website Minimum-Wage.org. Here is just one statement from the “History” section:
Before the minimum wage was introduced during the Great Depression of the 1930s, there was no national minimum wage, or indeed any legislation to protect workers from exploitation.
Workers are free to choose who they work for, where they work, and in what conditions. They do not have to accept what their “corporate overlords” tell them. In reality, workers are free to work where they like to the limits of one’s ability (if you work at a gas station next to a hospital, you probable can’t get a job as a brain surgeon). It’s true, that employers have a measure of control over employees. You do the employer’s work at the time you agreed to–that’s what a job is. It’s also true that employees have a measure of control over the employer. Employees have skills that the employer is willing to paying for. If an employee has a skill worth paying for, competition between for the best talent will drive prices. Obtaining talented people is most easily done by offering superior wages.
Imagine a situation where there are only two companies– A and B. Both Companies A and B demand labor with similar skills. Company A offers its workers $10 per hour, while Company B offers $5. Naturally Company A receives more job applications. As a result, Company A can be more selective to whom they hire. Over time Company A experiences more success while Company B suffers do to lesser talent. In an effort to compete Company B begins to offer jobs at $12 per hour. This cycle will continue to until the law of diminishing returns kicks in or the firm becomes unprofitable. The point is wages are governed by competition and supply and demand like any other resource.
Another unintended consequence of minimum wage is it hurts the unqualified worker because it outlaws the employment of people whose skills demand a wage that are below that wage rate. All you accomplish is guaranteeing that those that are not talented enough to justify that wage rate will be unemployed. Ludwig von Mises wrote this in his book Planning for Freedom…
Minimum wage rates, whether decreed and enforced by the government or by labor union pressure and violence, result in mass unemployment prolonged year after year as soon as they try to raise wage rates above the height of the unhampered market.
Economists David Card and Alan Krueger have published studies of the fast food industry. Their studies show that even slight Congressional increases in the minimum wage cause minor job losses, and might even increase unemployment slightly in some instances. While Card and Krueger’s have been critiqued for underestimating raising the rates has because of the fact that minimum wage is already in existence, thus it is already caused significant unemployment for some workers. This factors are ignored. In their defense, I’m not sure how you calculate aggregate unemployment caused by minimum wage.
So is a minimum wage worth it? If you take a utilitarian approach it defiantly is not. Minimum wage deflates the dollar, and causes unemployment, and is unnecessary. Another question to consider is to whom does the minimum wage hurt the most? If I was a business owner and the minimum wage was installed and I knew I was going to need to make cuts, I would fire the least productive workers first. I mean that would makes sense. The most productive workers will keep their jobs, perhaps even with higher pay to compensate for the extra work. Meanwhile, the lesser-skilled workers will be unemployed. The unintended consequence of the situation is that most people who support a minimum wage are hoping to help out the workers at the bottom, when in reality, a higher minimum wage could very well put those workers out of a job.