Original post date: February 03, 2014
Article by: Ben Douglas
One of the more peculiar political phenomena of our time is the widespread support of minimum wage lawsamong unskilled labor, particularly service workers in low-wage industries such as hotels, restaurants, and retail shops. This is likely to increase with President Obama’s push to increase the minimum wage to over $10 per hour.
Economists largely agree that an effective minimum wage is likely to increase unemployment. Wages are generally set based on the perceived productivity of workers. Pushing wages higher than their productive level will result in fewer jobs, pushing low productivity workers into unemployment lines.
Yet, from an economist’s perspective, unskilled workers seem to provide broad-based support for increasing the minimum wage. Why?
Three possible reasons exist for their insistence upon pricing themselves out of the labor market. The first is they believe demand curves don’t slope downward. In other words, the higher cost of labor will not reduce quantity demanded for the labor among employers. If this is the case, the discipline of economics as a whole is being questioned and minimum wage debates are of the least concern.
The second is that they are masochists yearning for institutional unemployment. If this is the case, the ethical choice would be to quit their own jobs and refrain from subjecting their colleagues to such disparaging treatment.
The third possibility—and the most likely—is that they have been deceived by political agents with an agenda.
One factor that should make unskilled workers think twice about attempting to raise wages by legislative fiat is the wily support proffered by skilled labor—their competitors. Unions, which overwhelmingly represent skilled workers, have historically lobbied for minimum wage laws.
The AFL-CIO claims this is because they are a “critical and simple way to help repair the underlying weakness in our economy” and “would boost consumer spending and increase the purchasing power of millions of low-wage workers, especially in states with the highest percentages of low-wage workers.”
While this makes for excellent political propaganda, price floors in the labor market represent nothing short of inter-industry protectionism. Relatively wealthy, skilled, and white union laborers have a vested interest in minimum wages because they price their competition out of the labor market.
If the economic value of an hour of an individual’s labor is $5, and the minimum wage is $7.25, he will not be hired because his productivity doesn’t compensate for the cost of employing him. Because skilled and unskilled labor are substitutes, employers often turn to more productive—and expensive—skilled workers, even though it would be less efficient in a free labor market.
Unions support immigration control for similar reasons. Labor tends to flow to where capital is abundant, just as capital flows to where labor is abundant. Because the United States is a relatively capital-abundant country, workers migrate here in search of higher-paying jobs. These workers tend to be unskilled and thus represent a threat to union labor.
The iconic phrase “They took our jobs!”—made so by South Park’s brilliant satire of protectionism in the labor market—encapsulates the rage felt by American workers who are out-competed by migratory labor. (For a critique of this, see this video on the economic effects of the North American Free Trade Agreement, or NAFTA, on labor by ReasonTV).
Circumstances such as these illustrate the importance of economic understanding in policymaking. As economist Murray Rothbard noted, “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”