With California becoming the first state to raise minimum wage to $15 an hour this article is even more pertinent today as it was when written.
And it's just as damn good as it was back then.
I'm probably Rob's biggest fan. He is arguably one of the best political commentators/op-ed writers on the web.
Please read this. Enjoy it. Learn from it. I did.
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The Fallacy of the Minimum Wage - Part One
By Rob Janicki
The fallacy of the minimum wage and its claimed benefits continues on with eight states raising their minimum wage rates by an amount equal to the increase in the cost of living (inflation) as measured by the Consumer Price Index.
Minimum wage rates in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington will rise between 28 and 37 cents per hour on Jan. 1, thanks to state laws requiring that minimum wage keeps pace with inflation.
Rates in these states will range from $7.64 per hour (in Colorado), to $9.04 (in Washington) in 2012...
The first consideration to understanding the fallacy of the minimum wage is to clearly understand that the minimum wage is an artificial creation made by politicians, for the benefit of politicians for purposes of re-election. That should make it fundamentally suspect at the outset of any analysis. Minimum wage laws try to overcome and supplant the laws of supply and demand in a free market capitalist economy. This is akin to trying to deny the immutable law of gravity in physics because government mandates exceptions to that law of physics.
The joke that went around early in the Obama administration had Rahm Emanuel, Obama's Chief of Staff, when asked if the administration understood the law of supply and demand, stating that they would repeal any such law.
Moving along back to reality.
A rise in minimum wage rates is simply and without argument, an increase in the cost of doing business. This leaves a business with three possible actions or combination of actions to take in response to increased labor costs.
The first choice a business can make is to absorb the increased cost of labor by accepting a decrease in profits.
The second alternative a business can engage in is to increase the selling price of its goods or services to accommodate the increased labor costs incurred with the rise in the minimum wage rates.
The third option a business can exercise is to reduce the size of its labor force and thus offset the increased cost of labor input in the profit and loss computation.
Let's analyze each business choice.
If a business absorbs increased labor costs, it reduces its profits. This has two very negative results. First, it discourages investors from investing in the business with its reduced profit margins and rates of return on investments. Second, it reduces the entrepreneurial risk taking to innovate, because it makes the cost of making mistakes in exploring new technologies, more expensive based upon less money available to research and development programs. Third,it reduces the capital worth of the business, making credit more expensive to acquire. This increased cost of credit even further reduces the business profit margin. This becomes a vicious cycle and difficult to break.
The next choice or hurdle to overcome has to do with attempting to pass along increased costs to the ultimate consumer. The problem is that for each increase in cost inputs, there is a quantifiable decrease in consumers willing to pay higher prices for those products or services. In other words, increasing prices results in losing marginal consumers who might have previously made the business comfortably profitable and able to continue R&D development and save for rainy day economic downturns.
The third issue revolves around reducing the labor force by a factor equaling the increased cost input of the higher minimum wage rate. Let me spell that out for the terminally brain damaged liberals. Businesses will reduce the size and thus the cost of their labor force to meet the increased cost input of the higher minimum wage rate. Businesses will simply lay off people to maintain the same cost input and then push existing labor to match the previous productivity levels of the larger labor force.
Unfortunately there is also a fourth business consideration. Some businesses, especially sole proprietors or small partnerships will choose to go out of business and put their capital to work more efficiently through other means of passive investment.
Part II will analyze and comment on the effects of increasing the minimum wage as an economic stimulus to the macro economy.
The fallacy of the minimum wage: Part Two
Most of what I will outline below is common sense and I apologize in advance if it seems I am stating the obvious. If it were so obvious, liberal Democrats would not continue to push for higher minimum wage rates and I wouldn't be here explaining the myth of the minimum wage.
In Part I I outlined the options a business has in order to deal with an increase in the minimum wage, whether it is set by the federal government or state governments. A minimum wage increase is a quantifiable unit increase in the cost of labor. It is an important component in determining whether a business is profitable, to what extent it is profitable or whether it's a business operation that is actually losing money and headed for bankruptcy.
I indicated a business could absorb the increased labor cost from its profits (assuming it is profitable at the time), increase its pricing to offset the increased labor cost, reduce the labor force to compensate for the increased labor cost or as a last resort, cease business operations which would become unprofitable as a result in the rise of the minimum wage amd invest resources in some passive form of investment other than manufacturing or providing services to consumers.
Supply and demand of labor in the market place determines the relative worth of someone's labor and productivity, not some politician's idea of what someone should be earning in wages. Why do some people command higher wages/salaries while others do not? It's simply based upon the skill and the level of productivity they bring to the particular job.
Ditch diggers command a low wage rate because their productivity is very low when compared to a mechanical backhoe and one single operator, not to mention it is a dirty and back breaking job. A baseball All-star commands a higher salary, compared to other baseball players, because he brings a very high skill level to the game that most other players cannot perform to. A CEO that is able to lead an organization to greater profitability will receive greater compensation than another CEO who has failed to meet revenue and profit expectations.
Businesses pay people only what they have to in order to grow revenues resulting in increased profits. It's that simple. So, when a business pays a CEO what would appear to be a huge salary, it's based upon the belief that the CEO has the ability to lead the business to greater profits and that is always the bottom line.
So, what other factors make someone more valuable in the labor market than others? Education is one element, The longer it takes to gain an education and the commensurate skills in a field of work, the smaller the number of people are able to enter into that field when compared to the need for that skill. Think of professionals such as doctors, dentists, lawyers, engineers, etc.. Even then, when a field has more members in it than the market demands, one of two outcomes will result. Compensation will fall as employer choices increase in the available labor market or members of the professional group will migrate to other forms of employment that return greater compensation for the work effort put forth.
Another factor which contributes to determining a market based wage rate has to do with the element of danger inherent with some jobs. The greater the physical danger involved in a job, the fewer people are interested in pursuing that job. Deep earth mining is an example of a dangerous job that limits the pool of available labor compared to demand and thus it drives up the wage rate of that labor market. There are other similar jobs that limit the potential labor pool. Some people do not want to work at jobs that entail getting dirty, working in distasteful situations and conditions, such as collecting garbage. Any time a job has certain conditions associated with it, there is an inherent limiting effect on the available labor market. When the limitations are greater than the demand for that labor, the cost of that labor for employers will rise to encourage people to work for the highest available wage being offered by an employer.
By now it should be obvious that labor is a commodity of sorts like any manufactured item. Its a service provided by a laborer to an employer. In return the employer benefits from the utility of the worker's labor and productivity and is able to sell the resulting production of the employee, pay the employee and hopefully make a profit after all other related overhead costs are covered. The immutable law of supply and demand is at play in any labor market just as it is in any commodity market.
In Part III I will provide research data that supports the argument that artificially imposing minimum wage rates and any increases to that artificial floor on wages, actually decreases total employment and does very little to increase overall consumer spending as a result of nominal individual wage increases.
The fallacy of the minimum wage: Part Three
Part I, in review, was about the increase to the minimum wage of eight states. The discussion went on to illustrate the minimum wage as an artificial increase in the cost of labor for businesses and their four options in dealing with the increased labor input cost, the last of which was to cease business operations and invest in passive enterprises not requiring anything close to intensive labor input costs.
Part II, although somewhat pedantic, illustrated how labor has its own market like a commodity and is then subject to the economic law of supply and demand. Part II went on to illustrate the variables that went into determining how one unit of labor might be different than another through education, training, skill level, experience, etc..
Part III, to be fair,will begin with the liberal argument that the minimum wage and any increases are necessary and beneficial to both the individual and the economy. I hope to be able to clearly illustrate two points as I deconstruct the liberal fallacy of the minimum wage as an economic stimulus and as an individual benefit.
Let's start out with some very recent data from a liberal think tank and their conclusions on what effects increases in the eight state minimum wage rates will have on individuals and the economy.
The small boosts for 2012 are estimated to tack an extra $582 to $770 a year onto the paychecks of full-time workers, according to the National Employment Law Project, a non-profit advocacy group.
The problem with
the above analysis is the assumption that the work force numbers will
remain the same after the implementation of the higher minimum wage.
Here's what history
has taught us with the last increase in the minimum wage rate at the
national level. It is objective and has been quantified by the facts,
unlike subjective and selective forward looking prognostications by the
political class or their sycophants.
From the Wall Street Journal of October 3, 2009:
Earlier this year (2009), economist David Neumark of the University of California, Irvine, wrote
on these pages that the 70-cent-an-hour increase in the minimum wage
would cost some 300,000 jobs. Sure enough, the mandated increase to
$7.25 took effect in July, and right on cue the August and September
jobless numbers confirm the rapid disappearance of jobs for teenagers...
The
September teen unemployment rate hit 25.9%, the highest rate since
World War II and up from 23.8% in July. Some 330,000 teen jobs have
vanished in two months. Hardest hit of all: black male teens, whose
unemployment rate shot up to a catastrophic 50.4%. It was merely a
terrible 39.2% in July...
As the minimum wage has risen, the gap between the overall unemployment rate and the teen rate has widened...
Congress
and the Obama Administration simply ignore the economic consensus that
has long linked higher minimum wages with higher unemployment. Two years
ago Mr. Neumark and William Wascher, a Federal Reserve economist,
reviewed more than 100 academic studies on the impact of the minimum
wage. They found "overwhelming" evidence that the least skilled and the
young suffer a loss of employment when the minimum wage is increased...
Part IV will bring
the fallacy of the minimum wage full circle to a complete understanding
that increases in the minimum wage actually cause a net increase in
unemployment resulting in more people falling into poverty than are
raised out of poverty by increased wages from raising the minimum wage
rate.
The Fallacy of the Minimum Wage: Part Four
Liberals would argue that an increase in the minimum wage increases economic activity and thus stimulates the macro economy. This is a subjective wish, as it has never been objectively documented to be the case. Will individuals stimulate the economy with a small increase in consumer spending or will businesses be able to stimulate the economy with increased investment opportunities from any savings of maintaining the current minimum wage rate? The facts speak to the latter. A simple principle of economics is at play here. When the price of labor increases, the demand for labor decreases. Labor, after all, is a commodity, just like a bushel of corn. When the price of a commodity rises, the demand for that commodity falls as fewer people are willing or able to pay the higher price for the commodity.
Another economic principle needs to be revisited for a better understanding of wages. Wages are money or capital as economists are want to say. Economic principle: capital flows to its highest utility. Translation: money moves to where it can effect the greatest result. If a person spends X dollars, those dollars may have some multiplier effect adding utility to the capital. However, if a business invests X dollars in capital equipment to improve or increase a manufacturing process going forward, the multiplier effect is exponentially greater because it continues on indefinitely and its utility continues to increase going forward.
If raising the minimum wage really created more wealth and stimulated the macro economy, then doubling the minimum wage should more than double the individual's wealth and really stimulate the macro economy. The problem is that in reality employment declines to some degree as a result of increased business costs that cannot be recovered by the means identified in Part I. Businesses, when confronted with higher labor costs and no increase in productivity, simply reduce their labor force and push the remaining labor force to make up the difference in productivity previously attained with the larger labor force. Or, businesses, when confronted with higher labor costs they cannot absorb, look to technology to replace human labor or at least augment the resulting reduced labor force. So, how does raising the minimum wage help the person laid off as result of businesses keeping labor costs at the present level of productivity? Remember, wage rates are inextricably connected to productivity rates. As productivity increases, businesses can afford to pay employees more based upon the increased productivity, which usually translates to increased profits.
The minimum wage, when all is said, done and argued, applies to entry level positions. Entry level positions are traditionally staffed with the young and inexperienced, looking to gain the experience necessary to move upward and onward in the world of work. If someone is 40 years old, married or living with someone with additional dependents and is working at a minimum wage job to support those dependents, there are only three explanations. The first reason is that the person is in transition and has yet to find employment that matches his/her accumulated skills and experience. The second reason is that the person is cognitively challenged to the extent that they cannot accept more complicated training, raising their level of productivity. The third reason is that the person has no developed work ethic and desire to achieve beyond an existence level. Lack of a work ethic and a desire to achieve has often been muted by government entitlement programs created by the liberal left who feel themselves to be more compassionate, caring, virtuous and even noble in their efforts to raise the quality of life of the poor and down trodden. Liberals cannot see the fact that they have become the enablers of personal mediocrity and subservience to a system of second class citizenship and servitude dependent upon government, in whole or in part, for their life long existence. From a political perspective the minimum wage is a liberal egalitarian effort at "redistributive justice". What liberals cannot achieve in the market place, through supply and demand for labor, they endeavor to change through government fiat.
Liberals would argue that an increase in the minimum wage increases economic activity and thus stimulates the macro economy. This is a subjective wish, as it has never been objectively documented to be the case. Will individuals stimulate the economy with a small increase in consumer spending or will businesses be able to stimulate the economy with increased investment opportunities from any savings of maintaining the current minimum wage rate? The facts speak to the latter. A simple principle of economics is at play here. When the price of labor increases, the demand for labor decreases. Labor, after all, is a commodity, just like a bushel of corn. When the price of a commodity rises, the demand for that commodity falls as fewer people are willing or able to pay the higher price for the commodity.
Another economic principle needs to be revisited for a better understanding of wages. Wages are money or capital as economists are want to say. Economic principle: capital flows to its highest utility. Translation: money moves to where it can effect the greatest result. If a person spends X dollars, those dollars may have some multiplier effect adding utility to the capital. However, if a business invests X dollars in capital equipment to improve or increase a manufacturing process going forward, the multiplier effect is exponentially greater because it continues on indefinitely and its utility continues to increase going forward.
If raising the minimum wage really created more wealth and stimulated the macro economy, then doubling the minimum wage should more than double the individual's wealth and really stimulate the macro economy. The problem is that in reality employment declines to some degree as a result of increased business costs that cannot be recovered by the means identified in Part I. Businesses, when confronted with higher labor costs and no increase in productivity, simply reduce their labor force and push the remaining labor force to make up the difference in productivity previously attained with the larger labor force. Or, businesses, when confronted with higher labor costs they cannot absorb, look to technology to replace human labor or at least augment the resulting reduced labor force. So, how does raising the minimum wage help the person laid off as result of businesses keeping labor costs at the present level of productivity? Remember, wage rates are inextricably connected to productivity rates. As productivity increases, businesses can afford to pay employees more based upon the increased productivity, which usually translates to increased profits.
The minimum wage, when all is said, done and argued, applies to entry level positions. Entry level positions are traditionally staffed with the young and inexperienced, looking to gain the experience necessary to move upward and onward in the world of work. If someone is 40 years old, married or living with someone with additional dependents and is working at a minimum wage job to support those dependents, there are only three explanations. The first reason is that the person is in transition and has yet to find employment that matches his/her accumulated skills and experience. The second reason is that the person is cognitively challenged to the extent that they cannot accept more complicated training, raising their level of productivity. The third reason is that the person has no developed work ethic and desire to achieve beyond an existence level. Lack of a work ethic and a desire to achieve has often been muted by government entitlement programs created by the liberal left who feel themselves to be more compassionate, caring, virtuous and even noble in their efforts to raise the quality of life of the poor and down trodden. Liberals cannot see the fact that they have become the enablers of personal mediocrity and subservience to a system of second class citizenship and servitude dependent upon government, in whole or in part, for their life long existence. From a political perspective the minimum wage is a liberal egalitarian effort at "redistributive justice". What liberals cannot achieve in the market place, through supply and demand for labor, they endeavor to change through government fiat.
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