More featuring Sudha Shenoy» , Minimum Wage»

Sudha Shenoy, World Money Analyst, February 1980, p. 6.
(With thanks to Mark Tier.)

Opposition to state-enforced minimum wages seems almost inhumane. How terrible to refuse workers a decent living wage! Yet that is precisely the effect of minimum wage laws! They force some people onto the unemployment rolls permanently.

For about thirty years, minimum wages within the US have been systematically raised and their coverage extended. This has enabled the affects to be more clearly gauged. These effects operate to lower the real incomes of the very groups that minimum wages legislation is ostensibly designed to help: those workers earning the lowest wages.

With higher wages, demand for labour declines. Workers are displaced to other lines of employment, in those sectors not (yet) covered by minimum wage legislation. Wages here are lower than elsewhere, and the workers so moved into lower-wage employment are those who productivity is lowest, i.e., the most vulnerable members of the workforce.

Secondly, there is an increase in open unemployment. Some part of this increase is “permanent” — it consists of would-be workers who are simply unemployable but remain in the workforce in the hope of finding a job. Higher costs of employment mean many small firms do not expand as they might, or go out of business altogether. In either case, employment opportunities are reduced below their potential level.

Thirdly, the lowest wage workers become more vulnerable to the vagaries of the trade cycle. Minimum wage legislation means workers are laid off when times are slack, rather than continuing to be employed at lower wages.

Ominous
A more ominous effect is an actual decline in the labor force, a sort of hidden unemployment. Many workers at the lower end of the wage scale become so discouraged by the lack of employment they stop looking altogether. They then have to be supported by those still in employment, either via the state-welfare bureaucracy, through intra-family payments, private charity or other means.

In sum, the net result of minimum wage legislation is to reduce both output and employment below the levels that could be reached. In the process, the workforce becomes more and more polarised: between those who are still in employment and that growing minority which must depend on other sources of income.

The group which has been most adversely affected by minimum wage legislation is teenagers and young people. After every increase in the legislated minimum wage, teenage unemployment rates have risen perceptively in relation to the overall rate of unemployment. Even when general unemployment rates were falling, teenage unemployment remained steady or continued to raise. Teenagers now have among the highest rates of unemployment of almost any working group. The proportion of teenagers entering the workforce has declined since the late 1940s.

Comparison with the British experience underlines this dire influence. Until 1975, teenage unemployment rates in Britain were close to, or below, the general average. A larger proportion of the teenage population was more gainfully employed than in the US. Britain had no minimum wage legislation.

Then in 1975 the Employment Protection Act and other pieces of legislation were passed. These Acts in effect allowed trade unions to set minimum wages for a number of occupations. Teenage unemployment rose abruptly, as did overall unemployment and the numbers seeking welfare benefits.

Blacks suffer
In the US, black workers — particularly young black workers — suffered even more. Historically, a larger proportion of the black population entered the workforce, as compared with the white population; and before the extension of minimum wage of legislation, the unemployment rates for younger black teenagers were actually lower than for white teenagers!

Unemployment rates, US males by race and age

____ | ___ 16-17 yrs ___ | ___ 18-19 yrs ___ | ___ 20-40 yrs
____ | _ Black _ White __ | _ Black _ White __ | _ Black _ White
1948 | _ 9.4% _ 10.2% __ | _ 10.5% _ 9.4% __ | _ 11.7% _ 6.4%
1978 | _ 50.4% _ 19.4% _ | _ 32.2% _ 13.0% _ | _ 22.5% _ 10.0%

[Source: “Government Sanctioned Restraints that Reduce Economic Opportunities for Minorities” (revised reprint) available from Policy Review, 513 C Street NE, Washington DC 20002.]

Proportionately fewer blacks now enter the labor force. In 1978, for every 100 white males aged 16 and over who entered the workforce, only 92 blacks did so (in 1948 the ratios were equal). The greatest drop in this participation ratio has been or young black teenagers; in 1978 for every 100 white males aged 16-17 who entered the workface, only 57 blacks did so. Minimum wage decrees resulted in more hidden unemployment for blacks than for whites.

Unemployment has risen more than twice as fast for blacks as for whites: for black males age 16-26, unemployment rates are between 2-3 and 2-6 times as high as for the corresponding white groups. Over half of all young black teenagers are now unemployed (as compared with less than 10% in 1948.)

Why are teenagers affected so disproportionately by minimum wage legislation? The main reason is that they are only at the start of their working careers: of necessity they lack the training which only work experience can give. They cannot match the productivity of older and more experienced workers. “Low” wages in fact reflect teenagers’ need for on-the-job training. By pricing them out of jobs, minimum wage legislation denies many teenagers the opportunity to acquire such training.

Black workers and black teenagers especially, suffer from additional disabilities, not of their own making. State schools in black areas, for instance, are of notoriously poor quality, in both north and south. It is now recognised that blacks are effectively excluded from many occupations by trade unions. On a wider scale, many blacks, especially in the south, have never had equal protection of their life, liberty and property. To offset these and other externally-imposed disabilities, one of the strongest weapons that blacks and especially black teenagers have is their willingness to work for lower wages. Minimum wage legislation denies them even this. Moreover, it adds further handicap. Previously, employers who wished to express their prejudices had to bear additional costs for doing this: white workers generally had to be paid more. Minimum wage legislation actually reduces these costs: demand for black labor declines even further.

The connection between minimum wage decrees and black (and teenage) unemployment is by no means obvious. Only the effects are visible. This lends a spurious plausibility to those who wish to argue (for instance) that black genes are somehow inferior.

Further indirect effects of minimum wage legislation are ominous. Teenage crime rates, especially those of black teenagers, have soared in recent years. School teachers are only too aware of the manifold problems presented by rebellious teenagers forced to stay on at school. But teenagers (and low-income blacks) are not union members, nor do they have any political influence. So neither legislator not trade union leaders take them into account when raising the minimum wage.

(in order of appearance on Economics.org.au)
  1. Government: the fastest growth area
  2. Zoning and the market for property
  3. What minimum wage laws really do
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