Tuesday, January 25, 2011

The Fallacy of Minimum Wage

While it sounds good on the surface, an artificial floor, established by government, at the point of a gun, flies directly in the face of the free market and the intent of our founders.
The argument used by our politicians to justify their meddling is that wages paid are too low for the working poor. The intellectual dishonesty arrives when those same individuals are the ones who establish economically what "Working Poor" actually means. Therein lies the fallacy alluded to in my subject title. Economically, over the long term, the net effect of our ever rising minimum wage is a staggering unemployment rate among our youth and an even more incomprehensible rate among our young racial minorities.

If the net economic effect of a political policy was to reduce poverty and provide more jobs at higher wages, on all counts it has failed and failed spectacularly. The federal minimum wage is a gleaming example of what Dr. Thomas Sowell calls a failure to "Think Beyond Stage One." Simply wishing that government meddling will make improvements, even in the short term, does not necessarily make it so. With unemployment amongst 16-24 year olds
eclipsing 24% and that of African American minorities in the same age group above 30%, perhaps it's time to ask if this policy has had its intended effect.


The economic fallout of minimum wage increases is significant. Some employers simply stop hiring entry level capital because it is no longer cost effective. Some have decided that the opportunity cost of adding automation is now less than the opportunity cost of hiring entry level workers and so they automate rather than hire. Some, especially small businesses, find
themselves in positions that make it virtually impossible to continue or expand operations, due to the increased wage burden placed on their marginally profitable businesses by government edict.


In short, increasing minimum wage, especially in an already volatile and unstable labor market, would likely prove devastating to entry level jobs. If we think beyond stage one and look at the long term negative effects provided by Minimum Wage laws, it should not be much of a step to argue for their abolishment altogether.

To quote one of my favorite economists, "Whatever reduces opportunities for gainful employment for people with little or no experience, has the effect of costing both them and the society far more than the lost jobs which have been dismissed as "meial" or as paying only "chump change." Thomas Sowell, Applied Economics, pp 40

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