 Minimum
Wage is a Maximum Fallacy
Sacramento distortions…
[by Anthony P. Archie] 12/22/05
With
the California State of the State Address just weeks away, Capitol
whisperers have divulged that a minimum wage increase will
be included in Governor Schwarzenegger’s 2006 agenda,
and that a preliminary proposal has tentative backing from
the leadership of both parties. This is unfortunate news
for working Californians because the minimum wage negatively
distorts labor markets.
The most
well known distortion is the higher unemployment that results
from minimum-wage laws. Setting the minimum wage above the
level where employers and employees would have mutually agreed
on labor services forces employers to cut back on the number
of hires. This has been empirically documented in a half-century’s
worth of economic research, most notably in studies on the
fast-food industry. Beyond unemployment, the labor market
is distorted in other, more indirect ways.
Contributor
Anthony
P. Archie
Anthony
P. Archie is a public policy fellow in Business and
Economic Studies. Prior to joining Pacific
Research Institute, Anthony earned his masters
degree in public policy from Pepperdine University,
specializing in economics and regional/local policy.
As part of his graduate work, he co-authored Crisis
in California: Reforming Workers’ Compensation,
a proposal that drew praise from an esteemed panel
of scholars and policy advisors. Mr. Archie has held
internships on Capitol Hill and in the State Assembly.
He received his B.A. in economics and political science
from Pepperdine University. [Archie index] |
Wages are
more than simple paychecks. They tell us information about
worker productivity. As workers get older, they learn skills
that are valuable to employers. As such, older workers are
usually paid more than younger workers who have not yet developed
these skills. With a minimum-wage law, younger workers, especially
teenagers, are hindered from developing these skill sets because
employers are less willing to pay more to train younger workers.
Employers would much rather retain the older workers.
Minimum-wage
laws prevent a low-skilled employee from working at the best
possible job she or he could find. Faced with the specter of
unemployment, many lower skilled workers will resort to “under
the table” employment at lower wages, or even engage
in illegal activities such as drug dealing, prostitution, or
property crimes.
Minimum-wage
laws also create an incentive for gender and racial discrimination
in the workplace. Because the higher wages do not reflect the
employees’ real worth, the employer must determine who
is more “worthy” to receive the higher rate. Employers
may prefer one group over another based upon preconceived assumptions.
The minimum
wage also negatively affects employers’ investment decisions,
which in turn influences worker productivity. With inflated
wages for workers, employers in labor-intensive industries
may have to cut back on non-labor expenses, including facility
and technology upgrades as well as the everyday goods and services
businesses need to stay afloat. Because such investment usually
results in higher worker productivity, a reduction due to a
minimum-wage hike equates to lesser long-term productivity
gains. Naturally, this inefficiency will occur throughout the
entire state, slowing GDP and employment growth.
It should
be noted that there is one sector of the labor pool that gains
from minimum wage laws: union members. This is not because
they receive the direct wage increase—union members usually
make much more than minimum wage—but through a reduction
in labor competition. Because minimum wage laws make low-skilled
workers more expensive, the price of union labor becomes less
expensive in comparison, giving union members a competitive
advantage in the workplace. Not surprisingly, unions actively
support most minimum wage increases.
If the talk
around Sacramento is true, then the minimum-wage fallacy continues
in California. Despite the ill effects of minimum-wage laws,
politicians from both parties still pander to those who believe
the laws help the poor. If politicians really want to help
the poor they should implement the most logical and practical
arrangement: free the labor market to match willing employers
and employees. CRO
copyright
2005 Pacific Research Institute
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