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Wednesday, September 14, 2005

Ceilings and Floors - Part 2

Once again, like a bad penny, the call for a higher minimum wage has come up – this time from Pennsylvania Gov. Ed Rendell. The initial trial balloon was floated a few months back, but now he has begun pushing for the measure based on faulty logic and class rhetoric. In his announcement on September 12, Rendell said, “We have not raised the minimum wage in this country in eight years and everyone knows and has seen other increases -- business profits have risen, worker productivity has increased, and the cost of food, clothing and basic necessities along with fuel prices, have climbed.”

The statement is true enough, but the implications are misleading. While inflation has resulted in higher prices for many goods, so, too, have wages. Average total compensation, including benefits, has risen at a pace greater than inflation over that same period. Moreover, because individuals rarely work year after year for the same wages, few who were making the minimum wage eight years ago are still doing so now. Attempting to compare changes in average prices to a fixed number not indicative of what typical workers are making is, at best, disingenuous.

Rendell goes on to say, “Pennsylvania cannot continue to increase the skill of our workers and not raise their salary base. Improving the income of our working men and women does not need to put our businesses at a competitive disadvantage, but it does need to help our working families get beyond the poverty line.”

At first blush, this seems merely to repeat the same canard that the salary base has been static and that it has fallen behind the cost of living. But a new wrinkle has been added: the tried and true call for justice for “working families” living below the poverty line. This stance is also horribly misleading.

At present, less than 90,000 Pennsylvanians are making the legal minimum, les than 1.6% of the working population (approximately 5.7 million) and it is to be expected that, consistent with minimum wage workers throughout the United States, the vast majority of the recipients are teenagers and young adults who are single and, frequently, living with parents, or are secondary wage earners in the household bringing in supplemental funds. At the time of the last minimum wage hike it was determined that heads of households trying to make ends meet accounted for about 10% of minimum wage earners (some studies have found the percentage to be even lower). Of that number, less than 3% were single parents. The great mass of poor families trying to make ends meet while making the minimum wage is nothing more than a persistent myth.

The minimum wage is neither more nor less than a price floor. Basic economics tells us that the institution of a price floor above the market level inevitably results in reduced supply. It matters not whether the product is sugar, SUVs or labor. If wages are artificially inflated, jobs dry up - period. Studies confirm this, as you might expect since it is the only outcome consistent with economic theory. There has, to date, been only one study to dispute this - in New Jersey - but the sample size was so small and its methodology so debatable that its conclusions are easily dismissed. And a subsequent re-evaluation of the data did show employment decreases.

This is not to say that as soon as wages are increased, there are mass firings, though, in a few cases, job loss has been immediate in small businesses already on the edge. The data, instead, indicate that there is a rapid contraction in job growth until equilibrium is once again achieved, either through structural unemployment (normal job changes) coupled with unfilled vacancies, job exportation (using cheaper foreign labor), or inflation. Inflation isn't affected tremendously, but an increase in wages at the lowest level tends to have a ripple effect through the rest of the labor market.

Which jobs are most affected? Often they are jobs in small businesses, and, since small business has always been the greatest job creator in the economy, this is a very bad thing. And they're not "McJobs", either. In the majority of markets, jobs at fast food joints are comfortably above the minimum. Those affected are low-skilled and entry level jobs most often filled by entry-level teens in urban areas (specifically young black males - the group with the highest unemployment) and … the working poor. Raising the minimum wage in order to give these groups a "living wage" actually reduces their job opportunities. And the elimination of entry-level positions can have a cascade effect as the people who would otherwise have taken those positions find it that much more difficult to obtain work experience in the first place.

The jobs lost are often those most easily transplanted outside of the country to take advantage of a cheaper labor force. Ironically, those most vocally opposed to “outsourcing” are the very ones most insistent that the minimum wage be raised.

But, the argument goes, the minimum wage prevents businesses (those "evil capitalists") from colluding to pay something less than a "living wage" - a mere pittance designed to keep a large segment of the workforce in poverty. Ridiculous! If that were true, then wages for the majority of jobs (and certainly for all entry-level ones) would be permanently stuck at or near the legal minimum. And such is clearly not the case.

Employers are scrambling to get people to work for them in entry-level jobs at well above the minimum. Why? Because workers can go somewhere else. High turnover is a problem for businesses. Why? Because workers do frequently go somewhere else - for better pay, for better benefits, maybe even a shorter commute. Even if the minimum were eliminated, wages for these jobs would not suddenly drop. Why? Workers tend to look unfavorably on pay cuts. And, historically, wages have never been forced downward, not even during the Great Depression (they may become devalued through inflation, but that is not the same thing). None of these wide-spread and easily identified realities could ever happen in a system controlled by such collusion.

Further, if widespread employer collusion were taking place, unions could not exist, because companies would decide, en masse, not to hire union workers. Instead union membership has been declining for reasons that further undermine the collusion argument: workers have been getting acceptable wages and working conditions without having to pay dues and union leadership has become disconnected from the needs of the membership. If, and only if, workers find that employers are not meeting their needs, union membership will climb again. When the union movement began, employers had the right to hire who they wished and replace striking workers at will. Unions flourished anyway because employers were not meeting workers' needs. That has changed.

The unchangeable reality of the job market is that job-seekers cannot find jobs at rates higher than employers are willing to pay and, at the same time, employers cannot find employees at rates lower than people are willing to work for. This is called equilibrium. Employers will, inevitably, attempt to fill positions as cheaply as possible in their own interests. But, if they do not offer enough to attract enough competent workers, the business will, just as inevitably, fail.

And the "living wage" is a myth. The market will not allow that kind of manipulation and will continue to adjust accordingly. Some jobs, by themselves, simply will never be of sufficient value (in sufficient demand) in society to warrant enough compensation to provide an adequate standard of living. Raising the minimum wage does not alter the value of these jobs, it simply eliminates them.

It isn't a matter of morality or social justice, it is simply recognizing the inevitable consequences of a specific course of action. The market mechanism is oblivious to class distinctions so it matters not at all whether there are groups of people characterized as either poor, middle class, or rich. The market will set wage rates in exactly the same way that it sets prices for any other goods available in the marketplace.

Government intervention increases the inefficiencies in the market mechanism and consequently increases unemployment. In fact, one of the reasons that unemployment levels have fallen to near-record lows (4.9% pre-Katrina), is because the minimum wage has not been increased and has become devalued by inflation.

It's not that raising the minimum wage in order to "help American workers" is a bad idea because the intentions behind it are immoral. It's a bad idea because it doesn't accomplish the stated goal and, in fact, makes matters worse. It reduces job opportunities for those it seeks to help and, ultimately, increases the gap between rich and poor as those who can't find work are left behind.

By way of analogy, consider a suspended ladder, such as you can find at the bottom of a fire escape. It does not reach the ground. If you raise the ladder, those who can reach the bottom rung are lifted higher. A few on the ladder may fall off when it's raised, but not many. The real problem is that, at the ladder's new height, the bottom rung is now out of reach for far more people.

Those still on the "bottom rung" experience an increase in discretionary income, but only in the short term, and it doesn't translate to the economy as a whole. Since job opportunities are eliminated by the artificial wage hike, the benefit of any increase in discretionary income is offset by the effects of higher unemployment. Until it is affected by other external forces (productivity, business investment, technology - not individual wage levels), the pool of capital available for labor stays relatively unchanged.

Reality is a bitch - and she doesn't care if a minimum wage sounds good, it just doesn't work. It harms the very people it is ostensibly designed to help.

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4 Comments:

Anonymous Anonymous said...

I'd like to see another essay like this, explaining how mandatory government licensing creates the wage-fixing at the other end and hurts the job market and economy (ie in the medical profession, for example), -and how the "necessity" of this kind of licensing is essentially a government swindle on the populace.

V_O

12:22 AM  
Anonymous Fire Your Boss said...

Hi Fletch, I am enjoying some idle time and looking to see what Work at Home will bring up. this post is certainly interesting and informative. Work at Home is a good word to bring into the conversation. Great post. Enjoy your day!

10:25 PM  
Anonymous Freedom from a Job said...

Hi Fletch, it’s late in the evening, quiet and peaceful. This is good computer time for me. I thought I would check on Work at Home and see what came up. this post is something that is interesting to many people. I will also spend a little time checking on Work at Home. Getting late, have a good evening.

1:55 AM  
Anonymous Work at Home said...

Hi Fletch, I am enjoying some idle time and looking to see what Fire Your Boss will bring up. this post is certainly interesting and informative. Fire Your Boss is a good word to bring into the conversation. Great post. Enjoy your day!

1:30 AM  

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