Milton Friedman on minimum wage laws“There are always in these cases two groups of sponsors: there are the well-meaning sponsors and there are the special interests who are using the well-meaning sponsors as front men….The special interests [in this case) are, of course, the trade unions…The do-gooders believe that by passing a law saying that nobody should get less than….whatever the minimum wage rate is you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to ensure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate…is over twice as high as the overall unemployment rate. It is no accident that that was not always the case until the 1950s when the minimum wage rate was raised very drastically, very quickly. Teenage unemployment was higher than ordinary unemployment because of course the teenagers are the ones who are just coming into the labour market… but it was nothing like the extraordinary level it has now reached. It’s close to 20pc. Why? Because the minimum wage law is most properly described as a law saying that employers must discriminate against people who have low skills…The consequences of minimum wage rates have been almost wholly bad: to increase unemployment and to increase poverty. Moreover the effects have been concentrated on the groups that the do-gooders would most like to help. The people who have been hurt most by minimum wage laws are the blacks. I have often said that the most anti-negro law on the books of this land is the minimum wage rate. ”
Transcribed from THIS video http://www.youtube.com/watch?v=ca8Z__o52sk
WATCH IT !!
As ever, the clarity and logic of his comments are compelling.
I would add two things. First, with the government earnings supplements that now exist – but did not when Friedman was speaking, I suspect – if there were not minimum wages some employers would offer wages well below the minimum wage because both the employer and the employee would know that the government would make up the difference. That is always the trouble with government wage supplements.
Secondly sometimes welfare benefits can take the place of minimum wage rates. You might have a very low or non-existent minimum wage. But if you have easily obtained welfare benefits, they take the place of the minimum wage. Their effect can be even more pernicious since, in some places, you can take the benefit and also work on the side.
The biggest problem with Americans today, and the politicians that pander to them, is that they make choices based on emotional effect and not on data. This is why there’s no outrage over the budget-busting compensation of public sector employees like teachers, firefighters and police (yes, they all do important jobs, but the free market should dictate their salaries and compensation, not union thuggery and fleecing of the taxpayer), why nobody cares about all the stupid stimulus bills that had no impact other than to further increase our national debt (and hence, debt servicing costs), why people think price gouging is bad (gouging is GOOD) and of course, why Americans love a minimum wage. To add insult to injury, Obama used emotional platitudes to highlight why America needs to raise the minimum wage yet again. It is a terrible idea; here’s why:
- Forced Overpayment for Labor – I’m sorry, but someone should be paid what they’re worth to the employer. If it’s an absolutely zero skill job that just requires a body, why is the government mandating you pay them any set wage rate at all? Think like an employer. Consider a dishwasher. There’s no prior experience required, no special skills and easily replaced. Many restaurants use illegal immigrants for this type of role anyway, but let’s say they’re by the books and paying the full wage, payroll taxes (people forget about all the additional expenses business incur when something like this is proposed) and all the other costs associated with employing someone. So, the free market would probably peg a job like that at something like $5 an hour. But restaurants are forced to pay $7.25 due to existing minimum wage laws. Now, you increase it even further to $9. They’re not getting any additional productivity or profits for the money they’re paying; it’s just a government induced cost increase. Well, one of two things happens here. Either the profits must shrink forcing more restaurants out of business or they must raise their costs and pass it on to customers to maintain the same profit margins. By passing it on to customers, this is essentially a tax on Americans (yet another tax increase). You might say, “this is a typical argument and I don’t eat at restaurants”, but this applies to literally millions of jobs that touch goods and services you pay for. From grocery store clerks to janitors, throughout the entire country, companies you buy from are going to have to pass higher costs on to you to support jobs that people were already perfectly willing to work at prevailing wages. Teenagers take jobs at minimum wage all the time; now they’re getting an automatic raise just because their older college-age brother and sister voted for hope and change? Unfortunately, the emotional appeal of helping poor people is getting in the way of reality and the unintended consequences.
- I Thought Inflation Was Low? – Obama goes on to cite how tough it is to live on the current minimum wage, etc. We’ve always heard these same arguments and even at $9, the same argument could be made. So, why not just call it $15 an hour? How about $25 and hour? I mean, there’s no end to this philosophy. On one hand, the government claims we have no inflation (see what the REAL Inflation Rate is with this real-life index) as justification to keep pissing away over $1 Trillion a year more than we take in, yet on the other hand, they’re citing rising costs and difficulty in raising a family as the need to increase the minimum wage. Which is it? Are things cheap in the US or not?
- Handout Nation Has NEVER Been More Generous – There are entire books written on the topic, so I won’t go in to every nuance of the handout nation we live in, but just for starters, for a family living off 1-2 parents working the minimum wage, there are dozens upon dozens are various “government assistance” programs they’re already participating in. When you hear about someone making $16K a year, there’s linear comparison whatsoever to say someone making $64K a year is “4 times better off” than them. Yes, it sucks having a low income so don’t get sidetracked, but for reality’s sake, let’s consider all the additional benefits derived at that income level: SNAP (foodstamps) to the tune of a few hundred bucks a month (could be say, $4-5K/year. Equating that to after tax income of a $64K earner, perhaps say, $7K equivalent). Someone at that income level pays no federal income tax. Free Obama phone. Possibly housing assistance, health care assistance, various other forms of government assistance; the list goes on.
- Buy Me a Robot – I’ve said it before and I’ll say it again – Robots are Taking Over. Before you laugh off this futuristic threat, just consider thresholds. We all have thresholds. You might decide to pay the extra 5 cents a gallon to buy gas at the station on your street rather than drive a few miles down the road, but if the spread is 15 cents a gallon and you’re on empty, you’ll make the trip right? I was willing to pay for installation of the new flooring we bought at the $.99 per square foot deal being offered but my wife didn’t want that material (of course). What she wanted was $1.99/ft, so I spent a weekend putting it in myself. We all make decisions based on thresholds. Well, the more you increase labor, especially no-skill labor that has ANY chance of being either outsourced or automated, the more we see outsourcing and automation. Consider the dishwasher example. If the costs of physical labor increase enough, perhaps eventually it makes sense to just buy more dishes and buy some high-speed dishwashers! Consider a large building with 9 janitors. If their wages go up, then maybe they need to lay one off and get more out of the 8 or cut back on frequency of cleaning some less traveled areas. Whatever businesses have to do to maintain or cut their existing cost structure, they will do. So in the end, this is going to cost jobs both for minimum wage workers, while extracting a tax from consumers further impeding the recovery. Don’t you see?