Minimum Wage and Unemployment Rate – A Direct Relationship Essay
Minimum Wage and Unemployment Rate – A Direct Relationship
In any labor market, free or regulated, there is friction and rigidity that result in labor issues. With 11 million people unemployed, and millions more discouraged or underemployed, there is justification to believe that these high population levels represent a glitch in the American labor market (1). These basic statistics, coupled with the elementary economic theory of supply and demand, demonstrate that minimum wage regulation has not only proven to be unsuccessful, but should be eliminated immediately.
Although compulsory wage levels may be problematic in our contemporary labor market, the theory supporting a minimum wage dates back to over three centuries ago. The earliest evidence of a mandatory minimum wage could be found in New Zealand when in 1894 there was an effort to extinguish sweatshop labor. Also during this time, Australia made amendments to the Factories Act which created a wage price floor in six industries that were considered to have low paying wages. Although this amendment began as an experiment, within a few years additional amendments were created to expand minimum wage to over 150 different industries (2).
It took until the early 1900’s for the minimum wage model to appear in the United States. In 1912, Massachusetts set up a commission not to demand minimum wages, but to recommend them – especially for women and children. Within eight years, 13 US states and Washington DC implemented their own compulsory minimum wage laws (3). Due to challenges from the Supreme Court during the Lochner Era – a time where the Supreme Court exercised its power to protect economic liberty and private contracts – it took until 1938 for federal minimum wage laws to manifest in the United States.
Presented under the Fair Labor Standards Act under the scope of the Commerce Clause, the Supreme Court ruled that Congress had the power to regulate employment. As a result, the first ever federal minimum wage entered the market at 25 cents an hour (4). Today we have a federal minimum wage of $7.25/hour and even higher in some states like Washington where the minimum wage is over $9/hour.
Aside from the role minimum wage laws play in our current market, they’ve also made prominent news headlines and been in the minds of many laborers as of recently. Many of these headlines reveal a desire by workers and politicians alike to raise the minimum wage. Organized protests by workers in the fast food industry have assembled in the streets of major cities to bring to attention not only their demand for a much higher minimum wage, but for union representation as well. Additionally politicians like Barack Obama and Seattle Mayor Mike McGinn have spoken publicly about their desire for an increased minimum wage. While the President has put pressure on Congress to legislate a $9/hour minimum wage, Mayor McGinn has expressed his support for a $15/hour minimum wage by his respective legislators (5).
Aside from the strong political appeal that may encourage politicians to propose minimum wage increases, on the surface this type of legislation seems like a well-intentioned effort to raise the standard of living of people working for relatively low wages. This is not only because people naturally desire better things for themselves, but it also seems like a productive way to align wages with levels of inflation that the Federal Reserve is primarily responsible for (6).
To make minimum wage theory even more confusing, there have been multiple studies on the issue only to garner completely opposite results. David Neumark, an economics professor at UCI and William Washer, an economist on the board of governors at the Federal Reserve wrote a descriptive 155 page monograph that elaborately detailed the negative effects that minimum wage laws created.
Conversely, David Card an economics professor at UCB and Alan Krueger, a professor at Princeton University, published a highly renowned study that concluded minimum wage laws would only cause minimal job loss and in some instances could even raise employment levels (7). However, when studying economic phenomena mixed results are completely common due to the failure to meet the cetaris paribus condition, which stresses the concept of keeping variables constant. Not surprisingly, there were very few constant variables between these two studies. So rather than fill this essay with the observations of others, I plan to mainly use deductive reasoning to discuss the logical consistency of my argument. Because minimum wage laws are not only self-defeating but also make society poorer, it is in everyone’s best interest, especially those the law is intended to help, to abolish minimum wage laws immediately.
In rudimentary economic studies, we learn about the affects supply and demand have on market clearing prices and that where supply meets demand is price equilibrium. We also learn that when prices are arbitrarily set above equilibrium, the result is a surplus. Wage labor is no different, and when analyzing this data, the surplus can be expressed as unemployment.
These surpluses (unemployment) result when the productivity of a laborer is not high enough to warrant the new minimum wage. Now an economic burden to the company, the employer will have no choice but to terminate the employee(s) in order to remain profitable in their endeavors. Because these compulsory created economic burdens will generally be people already earning relatively lower wages, wage price floors actually hurt the people they are intended to help. Even if one was to claim that the terminations resulting in raising the minimum wage were offset by the new people making higher nominal wages, this person would be committing an arbitrary value judgment.
Additionally, minimum wage laws have a dampening effect on inner city youth (8). After spending time in subpar public schooling, many underprivileged adolescents are forced to turn to the streets instead of taking a low paying position where he would be able to acquire skills on the job. Rather than gain working experience, he is more prone to a perpetual cycle of poverty and violence. When viewed from a more macro approach, there are even worse social ramifications. Unemployment is universally agreed upon as a bad thing.
This is because the negative effects have no offsetting benefits, rather they are considered a dead loss. When unemployment levels rise, people tend to crave acts of protectionism, which is are strives to restrict the immigration process and limit imports from competing countries. Not only can these actions lead to retaliatory actions from other countries, but can also impede the influx of cheaper goods, which will directly hurt the unemployed (9). Not only will unemployment lower total national output, but it also creates a demand for costly federal and state services such as the unemployment program.
Furthermore, the logic behind the minimum wage legislation seems to contain not only many dissenting opinions on what the nominal wage should be, but many faults in logic as well. Down to the cent, there are thousands of people who all support the minimum wage but at different amounts. Although most main stream public figures seem to restrain a wage price floor from exceeding $20/hour, wouldn’t consistent logic prevail for compulsory wages of at least $100/hour or even $1,000/hour? Clearly, this is absurd. Rather than having economists design the economy, evidence prevails that it would be better for people to decide respective wage levels on their own. While it may be true that “moderate” rises in the minimum wage may not lead to substantial changes in the rate of unemployment, this is exactly why these laws are self-defeating. This price floor only affects a small sect of the economy, making some of it unemployed.
When laborers compete for a job, they have two tools. On one hand is productivity and ingenuity. On the other hand is the wage at wish they are willing to work for. If a relatively unproductive worker wants to compete with a highly productive worker, then he or she must naturally accept a lower wage. In doing this, the worker gains a form of payment through knowledge and information that can be taken with them throughout life. Denying this ind ividual the right to do so, with arbitrary government price floors, removes his or her ability to compete and to find employment. Not only will this disarm the very people the laws were intended to help, but it also blocks a person from a basic right to work at whatever wage he or she chooses to do so at.
Through the use of deductive reasoning, it is quite clear that although well intentioned, minimum wage laws have created a disturbing effect on our contemporary labor market and have had negative effects on the people they were designed to help. It should come as no surprise then that the urban
areas of our nation experience the highest levels of unemployment.
1) “Employment Status of Displaced Workers : The Editor’s Desk : U.S. Bureau of Labor Statistics.” U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics, 1 Sept. 2013. Web. 21 Oct. 2013. 2) “History of the Minimum Wage.” Wikipedia. Wikimedia Foundation, 08 Feb. 2013. Web. 21 Oct. 2013. 3) “Minimum Wage in the United States.” Wikipedia. Wikimedia Foundation, 21 Oct. 2013. Web. 21 Oct. 2013. 4) “Lochner Era.” LII. Cornell University Law School, n.d. Web. 21 Oct. 2013. 5) Associated Press. “Seattle Mayor Would Support Minimum Wage above $15.” USA Today. Gannett, 9 Oct. 2013. Web. 21 Oct. 2013. 6) Casey, Chris. Killing the Currency. Ludwig Von Mises Institute, 27 May 203. Web. 21 Oct. 2013. 7) MacKenzie, D.W. “The Ludwig Von Mises Institute.” Minimum Wage Laws: Economics versus Ideology. N.p., 14 June 2007. Web. 21 Oct. 2013. 8) Caldwell, Roger. “Inner City Black Male Unemployment At 50 Percent.” West Orlando News Online 2013® Central Florida News, Info, Sports. N.p., 15 Nov. 2009. Web. 21 Oct. 2013. 9) “The Cost Of Unemployment To The Economy.” Investopedia. N.p., 9 Aug. 2011. Web. 21 Oct. 2013.