Minimum Wages: The Concise Encyclopedia of Economics | Library of Economics and Liberty

Minimum Wages: The Concise Encyclopedia of Economics | Library of Economics and Liberty

Most noneconomists believe that minimum wage laws protect workers from exploitation by employers and reduce poverty. Most economists believe that minimum wagelaws cause unnecessary hardship for the very people they are supposed to help.
The reason is simple: although minimum wage laws can setwages, they cannot guarantee jobs. In practice they often price low-skilled workers out of the labor market. Employers typically are not willing to pay a worker more than the value of the additional product that he produces. This means that an unskilled youth who produces $4.00 worth of goods in an hour will have a very difficult time finding a job if he must, by law, be paid $5.15 an hour. As Princeton economist David F. Bradford wrote, “The minimum wage law can be described as saying to the potential worker: ‘Unless you can find a job paying at least the minimum wage, you may not accept employment.’”2Several decades of studies using aggregate time-series data from a variety of countries have found that minimum wagelaws reduce employment. At current U.S. wage levels, estimates of job losses suggest that a 10 percent in crease in the minimum wage would decrease employment of low-skilled workers by 1 or 2 percent. The job losses for black U.S. teenagers have been found to be even greater, presumably because, on average, they have fewer skills. As liberal economist Paul A. Samuelson wrote in 1973, “What good does it do a black youth to know that an employer must pay him $2.00 per hour if the fact that he must be paid that amount is what keeps him from getting a job?”3 In a 1997 response to a request from the Irish National Minimum Wage Commission, economists for the Organization for Economic Cooperation and Development (OECD) summarized economic research results on the minimum wage: “If the wage floor set by statutory minimum wages is too high, this may have detrimental effects on employment, especially among young people.”4 This agreement over the general effect of minimum wages is long-standing. According to a 1978 article in American Economic Review, 90 percent of the economists surveyed agreed that the minimum wage increases unemployment among low-skilled workers.5Australia provided one of the earliest practical demonstrations of the harmful effects of minimum wage laws when the federal court created a minimum wage for unskilled men in 1921. The court set the wage at what it thought employees needed for a decent living, independent of what employers would willingly pay. Laborers whose productivity was worth less than the mandated wage could find work only in occupations not covered by the law or with employers willing to break it. Aggressive reporting of violations by vigilant unions made evasion difficult. The historical record shows that unemployment remained a particular problem for unskilled laborers for the rest of the decade.
At about the same time, a hospital in the United States fired a group of women after the Minimum Wage Board in the District of Columbia ordered that their wages be raised to the legal minimum. The women sued to halt enforcement of the minimum wage law. In 1923, the U.S. Supreme Court, inAdkins v. Children’s Hospital, ruled that the minimum wage law was price fixing and that it represented an unreasonable infringement on individuals’ freedom to determine the price at which they would sell their services.
In addition to making jobs hard to find, minimum wage laws may also harm workers by changing how they are compensated. Fringe benefits—such as paid vacation, free room and board, inexpensive insurance, subsidized child care, and on-the-job training—are an important part of the total compensation package for many low-wage workers. When minimum wages rise, employers can control total compensation costs by cutting benefits. In extreme cases, employers convert low-wage full-time jobs with benefits to high-wage part-time jobs with no benefits and fewer hours. David Neumark and William Wascher found that a 10 percent increase in minimumwages decreased on-the-job training for young people by 1.5–1.8 percent.6 Since on-the-job training is the way most people build their salable skills, these findings suggest that minimumwage laws also reduce future opportunities for the unskilled.
A particularly graphic example of benefits reduction occurred in 1990, when the U.S. Department of Labor ordered the Salvation Army to pay the minimum wage to voluntary participants in its work therapy programs. In exchange for processing donated goods, the programs provided participants, many of whom were homeless alcoholics and drug addicts, with a small weekly stipend and up to ninety days of food, shelter, and counseling. The Salvation Army said that the expense of complying with the minimum wage order would force it to close the programs. Ignoring both the fact that the beneficiaries of the program could leave to take higher-paying jobs at any time and the cash value of the food, shelter, and supervision, the Labor Department insisted that it was protecting workers’ rights by enforcing the minimum wage. After a public outcry, the Labor Department backed down.7 Its Wage and Hour Division Field Operations Handbook now contains a special section on minimum wage enforcement and the Salvation Army.8