“Vote No On Question 2″ : How Government Creates Unemployment with Minimum Wage Laws

“Vote No On Question 2″

Oct. 19 Economics, Election 2013, Minimum Wage

By Matt Rooney | The Save Jersey Blog

I opened my mailbox on Saturday afternoon, Save Jerseyans, and I found the nifty little mailer to your right (and at the bottom) among the bills and supermarket circulars.

It’s produced by “The Coalition to Preserve Jobs and Our Constitution,” a group of Garden State business owners dedicated to defeating a proposed constitutional amendment on New Jersey’s fall ballot which would hike our state’s minimum wage and, most troubling of all, constitutionally-mandating that all future increases be tied to the consumer price index.

– See more at: https://savejersey.com/2013/10/election-ballot-new-jersey-question-2-two-nj/#sthash.UChpukqK.dpuf

How Government Creates Unemployment with Minimum Wage Laws

Monday, October 31st, 2011 by Kel Kelly posted in Capitalism, Economics, Politics, Regulation.

British Columbia, why do you hate the poor?

Excerpted from “The Case for Legalizing Capitalism”

Politicians like to tell us that if we elect them, they will create jobs for us. This is impossible, unless they intend to expand government and have taxpayers pay more government workers to produce unprofitable services, or, to directly finance the creation of specific jobs in a specific marketplace with taxpayers money. In either case, a destruction of wealth is involved, and the jobs”unlike private sector jobs”do not pay for themselves and thus require yet new taxpayer funding each year, which further reduces capital in the economy. Except for the few wealth-destroying activities such as building space stations[ref]The space stations might eventually help us produce wealth, but do not currently. Even if they did, consumers would likely prefer to have other things for their lives instead of space stations. If space stations were to be a consumer preference (i.e., cost effective), they would likely be so decades or centuries down the road, not now. Plus, many things NASA is associated with having created were actually created by others. On this, see Tim Swanson, What wont NASA Build Next, https://mises.org/daily/2434.[/ref] and military bases, government creates and builds nothing. It thus has no power to create real jobs in the marketplace; it can only manage and regulate. It is only individuals and individual companies that produce and create; their ideas and capital are what profitably create jobs. The only way politicians can create beneficial jobs for us in the marketplace is by undoing the existing policies that create unemployment.

Thats right, the government (and only the government) creates unemployment, except for unemployment that arises from temporary factors such as switching between jobs. The notion that there could not be enough jobs for everyone is absurd. Think back to the desert island example: can we imagine that regardless of whether there is one person or many people on the island that they could ever run out of things to do to improve their standards of living? The same is true in our economy today. There are many more things needing to be done than we have people to do them. Most companies operating today, given available monetary capital, would expand production of what they are currently producing, or create new lines of businesses if only they had additional workers available to do this new work. And the more people we would have producing, the more things we could produce.

So then why is there unemployment? Primarily because some workers are prevented from working by having the cost of their labor fixed artificially high, above the market price, by law.[ref]And to a lesser degree by other labor laws such as those dictating maximum hours one can work as well as laws restricting the hiring and firing of workers, both of which are more intensely implemented and destructive in Western Europe and South America, where unemployment rates often reach over 20 percent.[/ref]This is done in two primary ways. The first way is by the existence of a minimum wage. As we learned earlier, workers are compensated based on the expected value of what they can produce. If the government prevents companies from hiring workers for less than a given wage, and if workers are not capable of contributing enough to company revenues to be able to cover the cost of their wages, they will not be hired. If a workers contribution to production brings in $5 of company revenues per hour, then paying the worker $7 per hour will mean a loss of $2 per hour to the company. Such workers will thus be left out of the workforce because they are unprofitable.

One might counter-argue that companies should pay a minimum hourly wage of $7 simply in order for the worker to survive given the cost of living. This argument will be addressed later in the section on poverty. It could also be argued that companies could pay more to workers by paying the difference out of profit, or by raising their prices. Neither of these is possible. As was explained earlier, businesses pay the maximum amount they can afford to pay for both labor and physical capital. Paying more will cut into the capitalists™ returns, or eliminate their profit altogether, which will drive them away toward other ventures; the entire company could thus go under (not to mention that companies must reinvest much of their profit in order to produce next years goods). Similarly, businesses cannot raise their prices to pay for higher labor costs. If they were able to raise prices at all, they would have already done so simply to make a higher profit. Businesses charge as much as the market will bear given a particular amount of money in the economy; if they charge more, they will make less money because demand will drop. Businesses across the entire economy will only raise prices if there is an increase in the quantity of money in the economy”i.e., the government prints more money. The current discussion is based on a fixed quantity of money in the economy at a given time.

If companies charge more, people will purchase a lower dollar amount (higher price times a lower overall quantity purchased). If companies charge less, their customers will purchase a higher dollar amount (lower price times a higher overall quantity purchased). Which way is optimal? Companies charge an amount that maximizes the total revenue they receive based on a price/quantity mix that results in the highest amount of revenue. If they charge more than the optimal amount, the total dollar amount of goods purchased by customers at that particular price/quantity level will be lower than the total dollar amount purchased at the optimal point possessing a lower price and higher quantity.

As an example, consider a theoretical burger joint where the owner is wondering whether raising prices would make it possible to pay more to the workers. Figure 1.4 reveals the different amounts of revenues that would result from various prices of hamburger plates.

Lowering the prices of each burger plate results in more burger plates sold. Raising the prices of each burger plate results in fewer burger plates sold. We can see that this owners optimal price to charge for a burger plate is $5.10. Charging more than this will result in lower revenues because the increase in price causes customers to buy fewer burger plates. Charging less than $5.10 will also result in lower revenues because even though the lower price leads to greater volume, it also means that fewer total dollars make it into the till. This example shows us that if the restaurant owner tried to charge more in order to pay workers more, the entire restaurant would lose business. The likely result would be the laying off of at least one worker in order to maintain profitability.

The minimum wage can help no one except those remaining workers who receive increased pay at the expense of the ones let go. Ultimately, having a minimum wage harms those it purports to help. But its more than ineffectual; its damaging. Those who are hurt the most are those with the lowest productivity”younger, less educated, inexperienced workers. Every time the minimum wage is increased, unemployment rates rise for this group, particularly for black, male teenagers. Further, as unskilled labor becomes too expensive to hire, businesses find it cheaper to replace labor with technology (automation, etc.). This is a primary reason why, for the most part, we no longer have many gas station attendants, maids or doormen.

Most economists, free market-oriented or not, do not support minimum wage: its one of the few topics nearly all agree on. Those who do support the minimum wage usually do so for ideological or political reasons. The ideological reasons are based on emotions, not economic facts. The political reasons are obvious: to most politicians it seems not to matter whether they truly help or harm citizens. What is important to politicians is to be perceived as helping people. When Congress approves minimum wage legislation after hearing testimony from economists, most, if not all, of them voting in favor of it must surely be aware that the law will not help workers. The only explanation seems to be that they pass the law simply to look good to constituents who dont understand the harm done.

In his 1993 textbook,[ref]Joseph E. Stiglitz, Economics (New York: W.W. Norton, 1993).[/ref] Joseph Stiglitz wrote detailed explanations of how minimum wages, which are a type of price floor, cause unemployment.
Yet after being appointed chairman of President Clintons Council of Economic Advisors (CEA), he suddenly changed his opinion and supported minimum wage legislation. Perhaps he did this to be seen a œteam player. President Clinton in turn said that he supported the legislation because his CEA supported it. Stiglitz, as leader of the CEA, pointed to the fact that a handful of economists had signed a petition in support of the legislation as the main reason that he had chosen to support it. In the end, this minority of economists all supported it simply because they all supported it.[ref]Vedran Vuk, Professor Stiglitz and the Minimum Wage (2006), https://mises.org/daily/2266.[/ref]

The economists who come up with obscure and often methodologically and theoretically questionable statistical studies that contradict most other studies on the minimum wage and conclude that increasing the cost of labor can somehow improve the lot of workers, are either ignorant of economics or are attempting to circumvent economic laws. Logic alone tells us that if the price of labor is raised above the value of its usefulness, there will be less of a demand for it. After all, if raising wages will help workers, then why not apply the minimum wage to everyone, and make the minimum wage $100 per hour? Or $1,000,000 per hour?[ref]Naturally, pro-minimum wage economists managed to come up with “studies” where numbers were manipulated to show that a low minimum wage is helpful, but a high minimum wage is not.[/ref] Our politicians do not do this because they know that most of us would then be unemployed. We will see in Chapter 6 that artificially high wage rates were the primary reason the Great Depression lasted so long, and why it even evolved from a simple recession into a depression.

Kel Kelly has spent over 13 years as a Wall Street trader, a corporate finance analyst, and a research director for a Fortune 500 management consulting firm. Results of his financial analyses have been presented on CNBC Europe and in the online editions of CNN, Forbes, BusinessWeek, and the Wall Street Journal. Kel holds a degree in economics from the University of Tennessee, an MBA from the University of Hartford, and an MS in economics from Florida State University. He lives in Atlanta.

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