The Minimum Wage Cage

“As the price increases, the quantity demanded falls.”

Since last Tuesday night, five states have increased the minimum wage: South Dakota (+$1.25), Nebraska ($0.75), Illinois ($1.75), Arkansas ($0.25) and Alaska ($1.00). minimum wageMany were thrilled with the Republican victory……yet also thrilled at a Democratic wage hike. Now Democrats, in light of this success, are pressing the President to use an executive order (which is becoming very popular) to increase the minimum wage for federal contract workers, this time from $10.10 to $15.00, a second increase since using his executive power to increase from $7.25 to $10.10 back in February.

Obama has been calling for an increase in federal minimum wage (which is at a minimum of $7.25 an hour (with the individual States able to take it further)) which he has yet to get congressional support for. Nancy Pelosi stated after this recent election: 

“It is time for Republicans to end their relentless distraction, dysfunction and special interest obstruction, and put the middle class first,” said the California Democrat. “Congress should act swiftly to pass common sense legislation to jumpstart the middle class and energize our economy: invest in building America, raise the minimum wage, help free our young people from the crushing weight of student debt, and unleash the full potential of women into our economy.”

Now as I wrote in my last post, today’s culture finds ignorance amusing. And the practical knowledge they do have, they get from the opinions of those around them…and that ultimately from the media, in all its fullness. Thus, everyone loves a minimum wage increase, especially if it gets you, personally and immediately, more money. But though people rejoice at the immediate benefits, there is a simple and easily forgotten principle called the Law of Demand: 

At a higher price, other things being equal, less is demanded

Gary North quotes an article by Walter Williams expounding on this: 

I teach freshman economics at Loyola University, and I usually take a survey of my students on opening day. Are people responsive to changes in price? For example, if the price of cars rose by 25 percent, would people purchase as many cars? Supposing housing prices rose by 25 percent, what would happen to sales? Those are big-ticket items, but what about smaller-priced items? If a supermarket raised its prices by 25 percent, would people purchase as much? It’s not rocket science to conclude that when prices rise, people adjust their behavior by purchasing less.

This behavior in economics is known as the first fundamental law of demand. It holds that the higher the price of something the less people will take and that the lower the price the more people will take. There are no known exceptions to the law of demand” 

There is widespread consensus among economists on the issue of minimum wage laws and unemployment, Williams wrote.

“University of California, Irvine economist David Neumark has examined more than 100 major academic studies on the minimum wage. He states that the White House claim “grossly misstates the weight of the evidence.” About 85 percent of the studies “find a negative employment effect on low-skilled workers.” A 1976 American Economic Association survey found that 90 percent of its members agreed that increasing the minimum wage raises unemployment among young and unskilled workers. A 1990 survey found that 80 percent of economists agreed with the statement that increases in the minimum wage cause unemployment among the youth and low-skilled. If you’re looking for a consensus in most fields of study, examine the introductory and intermediate college textbooks in the field. Economics textbooks that mention the minimum wage say that it increases unemployment for the least skilled worker.”

Now the official Raise the Wage website argues otherwise, that the minimum wage is not to blame for teen unemployment, but just note their conclusion:

“The crisis in teen employment isn’t a wages problem as Mulligan contends, it’s a jobs problem. There aren’t enough to go around.”

To which I have to ask…..How in the world will an increased minimum wage help create more jobs?

Say the local craft store has to pay now $10 minimum wage as opposed to their minimum wage$7.50 they were paying before. They first will release those who are least skilled or experienced as they will have exceeded their budget. As the price they had to pay went up, the demand of their employees became too much. Next when jobs go to  hire, since they are forced to pay at least more than they were previously, they will look for only skilled and experienced employees, most of whom are not teenagers. Whose output is usually not sufficient to justify paying minimum wage? Those on the lower end of the economic ladder.

Walter Block put it this way:

“Typically, a large majority favors the minimum wage law, and they do so not out of malevolence. Rather, they really think that this law will raise wages and help the poor. My students think this law is like a floor rising, and thus raising everyone with it. They do not realize that a better metaphor is a hurdle, or high jump bar: the higher the level stipulated by the minimum wage law, the harder is it to “jump” into employment. This law eliminates the lowest rungs of the employment ladder, where especially young people can gain valuable on-the-job training, which will help raise their productivity. If this legislation were of such great help to the poor, I ask my students, why are we so [meager] about it? Why limit the raise to $10, or $12 or even $15, as some radicals favor? Why not really help the poor, and raise the minimum wage level to $100 per hour, or $1000 per hour, or maybe $10,000 per hour. At this point they can see that virtually the entire population would be unemployed, because it is a rare person who has such high productivity. But, then, hopefully, then can begin to see that a minimum wage of a mere $7 per hour is an insuperable barrier to employment for someone whose productivity is $4 per hour.”

The Law of Demand is a simple economic concept. It is taught in our economics books. It is preached by economists. But in actuality, minimum wage laws themselves reduce the demand for labor services. An increase in the amount only further decreases that demand.