Increasing the Cost of Labor
July 25, 2008 by elcap
Today the US federal minimum wage got a 12 percent boost, up to $6.55 an hour. This is good news for the unskilled laborers that will now receive a 70 cents-per-hour pay raise. But it’s not good news for everyone.
Hans Sennholz used to boom in his thick German accent, “When you increase the cost of labor, you decrease the demand for labor!” In economics jargon, wages are not immune to the law of demand. When stuff is suddenly more expensive, we tend to buy less of it, or we look for alternatives. The result of increasing the cost of cheap labor is that less of it will likely be purchased: Some people get a raise — but some get fired, or are never hired in the first place.
Fortunately, the majority of poor workers in the US already make over $6.55 an hour. This means they shouldn’t be harmed (or helped) by the change. In fact, as the WSJ editorial team points out today, “most workers who do earn the minimum wage aren’t poor…they are young single adults, teenagers living at home or spouses providing a second income.”
Milton Friedman wrote in Free to Choose that minimum wage laws are “one of the most…antiblack laws on the statute books.” The dirty little secret about these laws is that they’re supported by unions to protect union employees from cheap competitors. (Many other supporters are surely well-meaning.) The first minimum wage laws in the US had a catastrophic effect on African-Americans, who offered tough competition at low wages. An estimated 500,000 blacks lost their jobs.
Before such laws, even in times of rampant racism, blacks and whites had roughly the same unemployment rates. But ever since the government artificially increased the price of unskilled labor, a shameful percentage of blacks have been unable to find work. In a very real sense, the lives of countless minorities throughout our country have been harmed.
In March 2006 Ohio considered increasing its minimum wage and I had this letter published in the Cleveland Plain Dealer:
Minimum Wage Doesn’t Help Poor
One of the few principles economists overwhelmingly agree on is that increases in the cost of x lead to decreases in the demand for x. By applying this principle to wages we see that when the price of labor is arbitrarily raised it leads to decreases in the demand for labor. Thus, a government-mandated increase in the minimum wage will tend to make individuals who sell their labor below the newly established price unemployable. If a minimum wage lifted poor people out of poverty, why stop at the Democrat’s proposed $6.85 per hour? Why not increase it to, say, $100 per hour?
Low-paid laborers need the opportunity to gain experience and develop the skills necessary to acquire high paying jobs. By increasing the minimum wage, these Ohioans will be hard-pressed to find an opportunity to get that chance.
