‘Minimum Wage’ Really Means ‘Minimum Unemployment’

We’ve been around this track before.

Over at the Washington Times, David Bier and Iain Murray explain two ways governments can deliberately cause unemployment: forbid people from working and pay people not to work. On their face, these ideas seem too ridiculous to be policy, but the minimum wage and unemployment benefits do exactly that. The minimum wage forbids people from working below a certain price, and unemployment insurance pays people not to work, subsidizing unemployment.

Denied! Forbidding People to Work

Minimum wage causes unemployment because it artificially raises the cost of hiring new workers. For example, I manage a restaurant with about 15 employees. New Jersey’s minimum wage law forbids me from hiring anyone who wants to work for less than $7.25 per hour. I would probably hire 10 new employees if I could hire them for five bucks an hour–and there are plenty of high school kids out there looking to make a few bucks. The law, however, states that I cannot hire anyone who can’t produce more than $7.25 of output for me. In order for me to hire anyone, they already have to have experience for it to make economic sense. Even if they could potentially be worth more than the minimum wage, if the costs of training them to that level are prohibitive, I still can’t afford it. If they aren’t worth more than $7.25 to me, I can’t employee them, regardless of whether they want to work and I want to hire them.

This is true at any business. Minimum wage laws create unemployment by pricing unskilled workers–disproportionately young people, minorities, and immigrants–out of the labor market. Even worse than the immediate problem of being unemployable can be the long-run effects of unemployment. If I can’t hire you, as a young high school or college age kid, it probably won’t matter much to you, since you’re still living off your parents. But you are missing out on valuable employment that could give you the skills and experience necessary to get a job or advance down the road. You are starting out at a disadvantage by being denied opportunity to work, and you lose the employment history that can give you a chance at getting a higher paying job later on.

For older workers or immigrants, unemployment can be an even more serious problem. Unemployment and gaps in your resume are major liabilities when applying for a new position. Some employers even advertise not to apply if you are unemployed. As part of their ongoing efforts to alleviate unemployment, rather than repealing policies which discourage hiring, the Obama administration is looking to ban discrimination against unemployed workers–a ridiculous proposal which will help no one.

Another way the minimum wage decreases employment is more subtle and doesn’t show up in the official employment stats but is just as serious. If the state were to increase the minimum wage, as eight states just did, I may not necessary let go some of my less skilled workers, but I would not be able to schedule them as many hours. Trimming hours would reduce employment and incomes, but it wouldn’t show up on the labor statistics.

Minimum wage laws are the worst of all laws designed to help the poor, because they deny jobs to those who need them most. They disproportionately affect low-income and unskilled workers, reducing their opportunities and swelling the ranks of those on unemployment or welfare.

Paying People Not to Work 

While this sounds like Keynesianism reductio ad absurdum, there are a number of ways the government pays people to stay out of the labor force. The first, and most obvious, is mandatory unemployment insurance and other state unemployment benefits–which have been extended again and again. But another, often overlooked, way the government pays to keep people out of the labor market is the federal student loan program. The federal government subsidizes student loans which pay to keep young people out of the labor market and in school for many years, since most students won’t graduate in four years, and many go on to get postgraduate degrees. This provides an incentive to stay unemployed or virtually unemployed until well into adulthood, leaving students in debt, without job experience, and often useless degrees, if they graduate at all.

There are enough problems with the economy without governments actually trying to keep people from working. A neat ancillary benefit of the minimum wage, unemployment insurance, and government subsidized education is that it reduces labor competition, driving up the wages for those who are lucky enough to have jobs. If we really want to reduce unemployment we must correct the incentives and allow the market to function. Businesses want to hire. People want jobs. Politicians want low unemployment. The government needs to get out of the way and let us get back to work.