Friday, July 01, 2011

Minimum wage

Mark Perry, who provides the cartoon, also notes the following Wall Street Journal editorial:
The Center for American Progress, often called the think tank for the Obama White House, recently recommended another increase in the minimum wage to $8.25 an hour. Though the U.S. unemployment rate is 9.1%, the thinkers assert that a rising wage would "stimulate economic growth to the tune of 50,000 new jobs." So if the government orders employers to pay more to hire workers when they're already not hiring, they'll somehow hire more workers. By this logic, if we raised the minimum wage to $25 an hour we'd have full employment."
Indeed. Some points about the minimum wage:
  • Employment is a consensual act between the employer and employee. It's really no one else's business what mutually agreed-upon terms they arrive at. If the job isn't worth the employee's time or he/she can find a better deal elsewhere, don't take it.
  • The reason some employees don't make very much money is because they don't generate much value, not because their employers are mean or cold-hearted. After all, if the employees were generating lots of profit for them, competitors eager for similar profits would hire them away. 
  • Compensation is a function of productivity, which in turn is a product of skill and effort. The best way to improve skills is to get a job. Someone who produces $5/hour worth of output will not be hired if the minimum wage is $7.25/hour, as it would cause the employer to lose money. With no minimum wage, however, that same person could find a position at $5/hour or less and then learn skills on the job that would make them more productive and thus boost their compensation.
  • Unpaid internships are a clear illustration of just how nonsensical minimum wage laws are. Why should someone be able to work for free but prohibited from working for less than $7.25/hour? It makes no sense. In effect, we have a system where white collar workers can take unpaid employment in exchange for skills that will boost their compensation prospects in the future, while blue collar workers are denied the ability to start off at some wage less that $7.25/hour in exchange for learning the ropes.
  • It's rather amusing to me that the Democratic National Committee offers their interns a stipend of $1,000 for over three months of work (compared to over $3,500 at minimum wage), while at the same time support for minimum wage laws is almost universal within the Democratic party.  
The bottom line is that support for minimum wage laws is another example of shooting the messenger that is completely divorced from economic reality. Wages, like all prices set by the market, simply convey information. If someone makes only a few dollars an hour, it's a signal that's all they are worth. One may not wish that were so, but that's about as useful as wishing the sun wouldn't set.

The best way to improve the lot of someone making a small wage is to ensure the most dynamic economy possible with the greatest number of employment opportunities. The ability to get a job, learn skills and have firms compete for  labor is the best means of helping that worker.

But creating such an environment is difficult, and at the end of the day politicians don't get any of the credit. So instead we are stuck with facile solutions offered by rabble rousers who promise to use government decree to ensure that wages are increased and prosperity generated. It's a seductive but utterly false message.

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