On the Minimum Wage
On another site someone sent me a poster, asking me what I thought of it. It was from the political left, and had to do with the minimum wage. On the left side it said: McDonalds in Australia – Minimum Wage: $16/hour, Price of Big Mac: $4.47. On the right it said McDonalds in the US – Minimum Wage: $7.25/hour, Price of Big Mac: $4.62.
This leftist poster was meant to highlight some supposed glaring and unfair inequality. Since this person asked me what I thought, I said this: “Apples and oranges. The US does have a much lower minimum wage. But many if not most things are also far cheaper in the US, from cars to most foods to (importantly!) books, etc. So this is a quite misleading and mischievous post. And there are solid reasons to argue that raising the minimum wage actually hurts people – especially the poor.”
So let me here offer some of those reasons. Plenty of experts can be appealed to in this regard, so let them speak. And let me begin with four voices you would expect to argue for a higher minimum wage: three Black Americans and one Spanish American. They all argue against this.
First, Black economist Thomas Sowell:
One of the simplest and most fundamental economic principles is that people tend to buy more when the price is lower and less when the price is higher. Yet advocates of minimum wage laws seem to think that the government can raise the price of labor without reducing the amount of labor that will be hired. When you turn from economic principles to hard facts, the case against minimum wage laws is even stronger. Countries with minimum wage laws almost invariably have higher rates of unemployment than countries without minimum wage laws. Most nations today have minimum wage laws, but they have not always had them. Unemployment rates have been very much lower in places and times when there were no minimum wage laws….
In European welfare states where minimum wages, and mandated job benefits to be paid for by employers, are more generous than in the United States, unemployment rates for younger workers are often 20 percent or higher, even when there is no recession. Unemployed young people lose not only the pay they could have earned but, at least equally important, the work experience that would enable them to earn higher rates of pay later on.
Minorities, like young people, can also be priced out of jobs. In the United States, the last year in which the black unemployment rate was lower than the white unemployment rate – 1930 – was also the last year when there was no federal minimum wage law. Inflation in the 1940s raised the pay of even unskilled workers above the minimum wage set in 1938. Economically, it was the same as if there were no minimum wage law by the late 1940s. In 1948 the unemployment rate of black 16-year-old and 17-year-old males was 9.4 percent. This was a fraction of what it would become in even the most prosperous years from 1958 on, as the minimum wage was raised repeatedly to keep up with inflation. Some “compassion” for “the poor”!
Black economist Walter Williams says this:
The idea that minimum wage legislation is an anti-poverty tool is simply sheer nonsense. Were it an anti-poverty weapon, we might save loads of foreign aid expenditures simply by advising legislators in the world’s poorest countries, such as Haiti, Bangladesh and Ethiopia, to legislate higher minimum wages. Even applied to the United States, there’s little evidence suggesting that increases in the minimum wage help the poor. Plus, according to the Bureau of Labor Statistics, only 2.2 percent of working adults earn the minimum wage.
The crucial question for any policy is not what are its intentions but what are its effects? One of its effects is readily seen by putting yourself in the place of an employer and asking: If I must pay $6.25 or $7.25 an hour to whomever I hire, does it make sense for me to hire a worker whose skills enable him to produce only $4.00 worth of value per hour? Most employers would view doing so as a losing economic proposition. Thus, one effect of minimum wages is that of discriminating against the employment of low-skilled workers. For the most part, teenagers dominate the low-skilled worker category. They lack the maturity, skills and experience of adults. Black teenagers not only share those characteristics, but they are additionally burdened by grossly fraudulent education, making them even lower skilled.
Black commentator Harry Jackson writes in part:
Just because you worked at McDonalds for minimum wage after school didn’t mean that you expected to work there for the rest of your life. Back then, after graduating from high school, you might enter trade school, join the military, or start a business. If your family had the money, you might go to college. Regardless of how wealthy or poor your parents were, no one expected you to keep the same job you had in high school and somehow be able to support a family of four on the wages.
Paying one’s dues by holding a low-paying job offered many benefits for both middle class and working class young people. It taught them how to show up to work on time and how to be respectful and professional to a boss, coworkers and customers. It gave them a chance to prove they could be reliable and to obtain valuable character references for the future. It also motivated individuals to see the value in learning specialized skills, whether they did that through college or through some other option.
And Spanish American writer Frank Worley-Lopez offers more hard data here:
In an article in Forbes magazine, contributor William Dunkelberg claims that raising the minimum wage to $7.25 in 2009 cost some 600,000 minimum wage jobs to the total economy. That was with a wage increase of just 10 percent.
Raising the wage from its current level to $10 per hour would represent an increase of just shy of three dollars an hour or around 40 percent. If Mr. Dunkelberg’s numbers are correct, that would cost an additional 2.4 million jobs. Let’s dial back the rhetoric just a bit.
A study by Texas A&M University says that an increase of 10 percent for the minimum wage resulted in a 25 percent reduction in job growth. That is the number we should concern ourselves with. Forget the increase in the cost of doing business; forget the nearly automatic follow-on increase in cost to the consumer; forget that the extra money could very well be worth less than the current minimum wage because of the increase in prices. Any increase in minimum wage is sold as a way of helping poor workers get a bigger piece of the pie. However, how can increasing the minimum wage help the unemployed if there are fewer jobs for them to apply for in the future?
And a few words from Ed Feulner:
Many of today’s entrepreneurs and success stories began their careers in very humble employment circumstances. “Actress Patricia Richardson, star of the ABC sitcom ‘Home Improvement,’ scrubbed bathroom floors and toilets in a hotel,” notes Policy Review. “Telecommunications executive John J. Sie worked on the assembly line of a stapler factory. Ivan Seidenberg, the chairman and CEO of NYNEX, was a janitor.”
Not everyone rises to the top, of course, but entry-level jobs such as these — the same kind that will be in shorter supply if the minimum wage is hiked precipitously — have helped millions of Americans (most of whom are between the ages of 16 and 24 and work part time) learn the basic skills needed to succeed in any field: Show up on time. Look neat. Be courteous. Most of all, work hard.
Wendy’s founder Dave Thomas is among those who learned those lessons firsthand. He started off working in a diner owned by two Greek immigrant brothers. “They taught me the importance of being polite and of praising people for a job well done,” Thomas said. “From them I learned that if you work hard and apply yourself, you succeed. It’s really not that complicated.” However, if the politicians who want to jack up the minimum wage get their way, things are about to become a whole lot more complicated, both for workers and the economy.
Worse, says Heritage labor expert James Sherk, the minimum wage has already been hiked to more than $10 an hour, at least in effect. Why? Because of Obamacare’s mandate that employers provide “qualifying” health coverage or be penalized. Once the mandate kicks in in 2015, hiring costs will go up still more for employers. Low-paying jobs have given millions of Americans with no work skills the opportunity to step on the ladder of success, where they can rapidly advance to higher-paying jobs. Why cut off the bottom rung by hiking the minimum wage so dramatically?
Finally, Senator David Leyonhjelm of the Liberal Democrats (whose libertarian cultural and social views I often disagree with) says this about the Australian scene:
Other studies have shown that most people on low wages move on to higher wages after about a year. This shows that low wage jobs are an opportunity for people to start at a bottom rung and work up. The problem is, Australia’s regulated minimum wage is so high that many cannot even reach the bottom rung and begin to climb.
In fact, Australia’s minimum wage is one of the highest in the world. Australians start paying income tax once their annual income exceeds $18,200, but they are not allowed to get a full time job unless it pays more than $32,000 a year. In the OECD, only Luxembourg and France have a higher minimum wage. The minimum wage in both New Zealand and the UK is 84 per cent of ours; Canada’s is 78 per cent, Japan’s 58 per cent and South Korea’s 42 per cent. Other countries with which we might compare ourselves, including Austria, Germany, Finland, Sweden, Switzerland, Italy and Singapore, have no minimum wage at all….
Australia’s minimum wage runs counter to the Australian credo of giving everyone a fair go. It is time sensible voices in the Parliament agreed to help the underdog by removing the barriers that prevent them from getting a job and improving their lives.
All the facts, evidence and hard data seem to suggest that raising the minimum wage actually harms the very people that were meant to be helped. Once again, the left puts good intentions and emotions over reality. If good intentions end up actually hurting people, then it is time to scrap those good intentions.
Postscript: here is an older but terrific 3-minute video clip with Thomas Sowell debating this issue: http://www.liveleak.com/view?i=2d6_1386381528&comments=1
16 Replies to “On the Minimum Wage”
Great quotes, I totally agree, the greatest need for a young person starting on their vocational career is not the money itself, but the experience in their occupation and all those other life skills, dependability, budgeting etc that come with the fact of just having a job.
A differentiation should also be made whether a man or the person if you like, for sometimes it is the women who supports her family, is responsible for a spouse and dependent children. Mostly those who support a family are more reliable and less transient than those who don’t and will more often than not bring a greater gain to their employers.
There’s a fair amount of greed based spin in what you have quoted. McDonalds seems to be doing just fine in Australia and employing just as many people (per capita) as the USA. This is not a forum in which I can argue with you and there will always be discussion on what level the minimum wage should be set to but suffice to say:
Mal 3:5 And I will come near to you to judgment; and I will be a swift witness against the sorcerers, and against the adulterers, and against false swearers, and against those that oppress the hireling in his wages, the widow, and the fatherless, and that turn aside the stranger from his right, and fear not me, saith the LORD of hosts.
The Old Testament economic model, while completely based on free trade, also provided a fundamental level of assets with which people could make a living – hence the Biblical term “Commonwealth”. Without that inherent right in our society, the problems of poverty traps occur: Without a certain basic income it can be near impossible to advance. Yes there are many people who have escaped poverty but often through exploiting other people or through simple good luck and there are many more who have not.
You should also note that throughout the scriptures there was a basic expectation that people should be able to live on their wages. Unfortunately, whether it be people on welfare or those living on investments, there is a very wrong expectation in Australia that people should be able to live without working. This is a far bigger problem than that of a basic, liveable wage.
Totally agree – and it makes perfect sense. Does the left ever get anything right?
Ursula – well, if married people were taxed as a family by averaging father+mother income then things would be a lot fairer. (BTW This would match the family income method used for determining gov benefits!).
Regarding married employees offering greater gain than singles. For consistency, yes, but for direct output, not necessarily. Parents are sinking a big proportion of their energy and finances into the next generation. Singles aren’t. So in the higher demand jobs I would have to confess I can’t quite match the output potential of a focussed single person. But OTOH, there are plenty of jobs where I think it would be preferable to have a person with parenting experience. E.g. childcare, midwife, most social workers, much of public service (police, politicians, lawmakers) most teachers – esp younger people, and there are plenty of management positions where a bit of level-headed humility and a dash of compassion is desirable.
So it is very fair for gov to reward diligent parenting, since those parents are doing the country a big favour.
Well, The MacDonald’s Example –
There is something interesting about those figures – “Final Price of product” in relation to “Cost Of labor” – Indicating that the Profit margin in the USA is massively greater then the Profit margin in Australia – Profiteering? or just healthy business? – That’s the question….
The concept of minimum wage hardly existed some 30 years ago and probably rightly so – But “Hey Houston We have a problem” – massive immigration has drive the cost of labor down to perilous levels (Big business Loves this) and the indigenous population are suffering … Is there any other remedy apart from the application of “minimum wage”?
I run a small business, employing 5 full time and 2 part time people. If there was no minimum wage would I pay any of them less?
No, I would still need to compete with other employers for the workers, if I paid them lots less, they would leave.
But if I could hire people for $10/hr, I would have another 3 or 4 people to do more menial jobs that currently got done automatically, i.e. ROBITICS.
Thanks for all you do Bill,
Thanks Malcolm. The simple leftist answer of profiteering is of course wrong. As I said above, these international comparisons are fraught with danger, and really are a case of comparing apples with oranges. There are all sorts of factors and very real differences which need to be taken into account. For example, there are differences in labour costs, costs of living, energy costs, products and materials costs, transport costs, economies of scale, and so on. So as mentioned, the poster I opened this article with is very misleading and disingenuous.
Michael Weeks, this is precisely the forum to argue about such things.
The concept of a minimum wage forces employers to “value” unskilled labour uneconomically. If the employer recognised the value of a hireling as being above the minimum, there would be no need for a legally enforced minimum.
That is, the central government is telling an employer how to run his business, even if a potential employee has no skills “worth” employing him for.
So the rational employer says
a) I will go backwards if I employ the unemployable without being able to cover their wages via “useful” work (which could be releasing useable time from other staff by freeing them from say, menial filing jobs)
b) therefore I will not employ them, or as many of them, as I might have.
You seem to have only a limited understanding of what goes into the cost structure of large-scale international enterprises. Your comment on the greed component of MacDonalds (why is it always an “evil, US multi-national corporation” which is targeted? BHP-Billiton is Australian and bigger than MacDonalds), seems to be based on a gross over-simplification.
Posted from my tablet whilst on a work road trip, so apologies for brevity.
I’m not a lefty Bill, I believe business should be rewarded for the risk it takes having run a couple of businesses with my husband, but even aussie Dick Smith is concerned about the extreme capitalism happening in the world today. You may think me naive or uneducated but why are we only talking of minimum wages affecting employment and costs? What about a maximum wage-the footy clubs have salary capping-wouldn’t this mean more money to employ more people? I’m not against people getting say a million a year for these high stress/ highly skilled jobs but really do they need the multi millions they get? Surely 10 or 15 times more than the ordinary person would be enough! Can’t we let everyone have a small slice of the pie if they work for it and how do people sleep knowing they have such a big piece, or is the winner the one who dies with the most.
Thanks Margaret. Of course now we are no longer talking about a minimum wage, but salary caps. Yet once again we only have two main options here: some arbitrary government bureaucrat determines what is a “fair” rate (socialism), or the market – or in this case, share holders – decide (the free market). In a fallen world where no economic system will be perfect, I know which one I prefer. For more on this, see some more helpful and rational assessment from Thomas Sowell:
Back again, but from home now, so I can read more fully on a bigger screen.
I see that my comment about cost structures was not meant to address Michael but Malcolm. Apologies.
Bill has outlined some of the cost differences already. But there is also that error in history – the Australian worker had a minimum wage struck via a centralised wage-fixing system from 1907 (Harvester judgement) until the 1990s.
Competition policy then saw the main planks overturned in favour of localised wage-fixing and collective enterprise bargaining. The minimum wage was isolated and protected as a free-standing concept of its own thereafter.
More later – weariness is overtaking me… sorry.
John (Angelico) i would look forward to hear your answer to the second comment I made – strangely a comment that nobody seems willing to either address or reply.
Malcolm, I take it you refer to the “indigenous population” part?
To close the first part – our labour market is a market of buyers and sellers, and operates on the laws of supply and demand.
I doubt if the buggy-whip makers could command the kind of wages that a mining excavator or dump-truck driver could, or even a lowly mining pick-and-shovel man. There just isn’t the demand to lift the price of their hours to those levels.
Immigration (and population growth generally) do supply a labour force, and all employers like the idea of plenty of people who could be employed, working for both big and small business.
However, when you say “perilous levels” what do you mean? $200 per week? That’s more than I get from my humble little one-person self-propelled business. Or, since the minimum is around $11 per hour making gross pay $440 per week, do you call that perilous?
Are you aware that on top of the $11/hjour, the employer has to fork out another 30-35% in oncosts – compulsory super , Workcover, leave time (and sometimes actual dollar loadings)? That’s an extra 120-150 per week, so an employer has to be able to afford almost $500 per week to have a minimum wage employee on their premises.
Therefore he has to be able to charge for his goods or services enough to cover all of that and all his other running costs as well. BUT are you prepared to pay for that? Or do you go looking for better value hamburgers, or office furniture, or steel, or whatever the employer is producing?
Now to part two.
Indigenous population is not suffering because of immigration – unless you subscribe to the failed mythology of the “noble savage” or the fatuous ideals of Brave New World (where in the end, poor Mr Savage hanged himself).
Indigenous Aborigines are suffering from patronising do-gooders who firstly claimed that a generation had been stolen from their parents and their native tribal habitats by “rapacious whitey” (but nothing has been proved as yet).
NOW that same Stolen Generations mantra is preventing real help being given to tribal and half-tribal Aborigines because
a) there is now a fear of another “stolen generations” era
b) the same patronising do-gooders actually hold to the myth of the noble savage, so they want to keep Aborigines on welfare and in remote tribal hovels without any prospects for dignifying work.
They are preventing those Aborigines from fulfilling their God-given mandate to work (which command from God came before the Curse was imposed).
So those elitist do-gooders are actually keeping Aborigines out of the work force, and minimum wages are irrelevant to their situation.
In a prosperous country like Australia in 2014 it should be possible for a family to afford to preferably buy a modest home and furnish it, put food on the table, buy enough clothes for their needs, pay essential bills such as gas,elecricity water,council rates and essential insurance for a house, its contents and any medical costs.They should be able to run a car, cover any costs involved in public education and be able to afford a holiday once a year and have an occasional family outing or meal out.There should be no reason and it is only fair that these things should be affordable even on a minimum wage where the work that is done is essential to the prosperity of the nation.The wife should not have to work at a paid job to help pay for these things because childcare should be valued and the responsibility of the parents not the state.
However,the minimum wage should not be expected to support bad habits such as smoking ,drinking,non essential drugs,gambling or excessive expectations and spending on luxury goods, cars,holidays etc.
I am old enough to remember when a reasonable standard of living such as I have outlined here used to be possible on the minimum wage but I know it isn’t now. Large sections of society are excluded from the housing market altogether.If families don’t have two incomes home ownership isn’t possible in most cases.
Fifty years ago if women did work outside the home it was mostly part time and it was used to acquire items like washing machines,fridges and televisions more quickly it wasn’t to help pay the mortgage.
I realise expectations have gone unreasonably in many cases which has helped to create the situation society finds itself in now but in spite of that I think fifty years ago society was a better and safer place because of the then government policies.Consequently,there was less stress,less irresponsibility,less divorce, less juvenile crime, less drug and alcohol related problems, less greed but it is hard to turn the clock back
One question I have wanted to ask is whether minimum wage laws – or wages artificially inflated by militant unions which neither government nor businesses can control – actually serve to drive up the relative price of all goods locally?? If they do, as I suspect, minimum wages would do nothing to improve the purchasing power of the poor, but nonetheless this might actually intensify public support for them in some cases.
When local prices rise, it increases the purchasing power of a country’s residents relative to nations with lower or no minimum wages and weaker unions. Therefore the poor might support a minimum wage as a means of making imports cheaper than they would be on a free market – in the same way overvalued currencies in New Zealand and Latin America or farm subsidies in Europe and East Asia have that effect?
For nations which possess few or no natural resources, making imports cheap and (temporarily) increasing the purchasing power of the poor and perhaps the industrial sector who buy resources has been more or less a political must since World War I.
Thanks guys. As stated, minimum wage laws often harms workers, sometimes by seeing them replaced by automation. There are many examples of this, including this one: