Disadvantages of Minimum Wage Laws

Discussion in 'Economy' started by PoliticalChic, Jun 27, 2012.

  1. PoliticalChic
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    PoliticalChic Diamond Member

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    1. In 1938 the Fair Labor Standards Act (FLSA) established a federal minimum wage law for all employees engaged in interstate commerce.($7.25 as of 2009) When Social Security and medial benefits are included, the wage must be considered to be over $10/ hour. This governmental intervention in the labor market makes it impossible to argue that there is a free market in this respect.

    a. While legislative bodies have the power to order wage increases, they have not as of yet found a way to order commensurate increases in worker productivity that make the worker’s output worth the higher wage.

    b. Further, while Congress can legislate the wage at which labor transactions occur, it cannot require that the transaction actually be made, and the worker hired.


    2. Employers, of course, are free to make adjustments in their use of labor. Often said adjustments are at the expense of the workers who are most disadvantaged in terms of their marketable skills. They will lose their jobs, or not be hired in the first place.

    a. The workers who suffer most are the most marginal, usually youths, and racial minorities, disproportionally represented among low-skilled workers.

    b. Not only are the above made less employable by minimum wage laws, but they lose the opportunity to upgrade their skills via on-the-job training.


    3. The weight of research by academic scholars concludes that unemployment among some segments of the work force is directly related to legal minimum wages, See K.R. Kearl, et al., “What Economists Think,” and Alston, Kearl, and Vaughn, “Is There Global Economic Consensus,” both in the ‘American Economic Review.’



    4. Minimum wage laws actually lower the cost of discriminating against the racially less-preferred individuals. To understand, consider this nonracial example on the effects of such ‘price-setting.’

    a. Consider filet mignon and chuck steak. For argument’s sake, and in reality, consumers prefer the former.

    b. Now ask, then why does chuck steak sell at all? And, in fact, why is it that chuck steak outsells filet mignon?? It is less preferred…yet competes favorably with something more preferred??

    c. The answer is in what economists call ‘compensating differences.’ In effect the chuck says to you: “I’m not as tender nor tasty, but not as expensive,either! I sell for $4/pound, and filet mignon sells for $9/pound.”

    d. Chuck steak, in effect, offers to ‘pay’ you $5/pound for its ‘inferiority,’ a compensating difference.

    e. What if filet mignon sellers wanted to raise their sales against the less-preferred competitor, but couldn’t get a law passed forbidding the sale of chuck, what should they aim to do?

    f. Push for a law establishing a minimum steak-price, say, $9/pound for all steak.

    g. Now…chuck steak says: I don’t look as nice, I’m not tender or tasty as filet mignon, and I sell for the same price….Buy me!

    h. Prior to legislation, the cost of discriminating against chuck steak was $5/pound…Now?



    5. Thus, any mandated minimum lowers the cost (encourages) indulging in racial preference, or increases the cost of training unskilled labor.

    6. Now, if there are mandated minimums, employers will seek the more highly qualified candidate. Due to a number of socioeconomic reasons, white youths have higher levels of educational attainment and training.

    7. It should be pointed out that minimum wage increases gives employers an economic incentive to make other changes: substitute machines for labor; change production techniques; relocate overseas; and eliminate certain jobs altogether.
    See "Race & Economics," Walter E. Williams
     
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    Last edited: Jun 27, 2012
  2. Wiseacre
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    Wiseacre Retired USAF Chief Supporting Member

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    Below is from a 2003 column by Thomas Sowell. Goes to your point rather well. As noted in the news recently and on a few threads around here, the new french president (Francoise Hollande) intends to raise the minimum wage in France. We'll see how it works out; I'm guessing not real well.

    snippet:

    Most studies of minimum wage laws in countries around the world show that fewer people are employed at artificially higher wage rates. Moreover, unemployment falls disproportionately on lower skilled workers, younger and inexperienced workers, and workers from minority groups.

    The new Cato Institute study cites data showing job losses in places where living wage laws have been imposed. This should not be the least bit surprising. Making anything more expensive almost invariably leads to fewer purchases. That includes labor.

    While trying to solve a non-problem — supporting families that don't exist, in most cases — the living wage crusade creates a very real problem of low-skilled workers having trouble finding a job at all.

    People in minimum wage jobs do not stay at the minimum wage permanently. Their pay increases as they accumulate experience and develop skills. It increases an average of 30 percent in just their first year of employment, according to the Cato Institute study. Other studies show that low-income people become average-income people in a few years and high-income people later in life.

    All of this depends on their having a job in the first place, however. But the living wage kills jobs.

    Thomas Sowell
     
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  3. The Rabbi
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    The Rabbi Diamond Member

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    If you increase the price of something, you sell less of it.
    Establish a mandatory price floor higher than market and you end up with a glut on the market.

    These are basic Econ 101 concepts, and they apply perfectly to the labor market as anything else. We see the results: highest teen black unemployment probably ever.
     
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  4. PoliticalChic
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    PoliticalChic Diamond Member

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    Once again we see the truth of the axiom of St. Bernard of Clairvaux...

    ....The road to hell is paved with good intentions.
     
  5. PoliticalChic
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    PoliticalChic Diamond Member

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    "...supporting families that don't exist, in most cases — the living wage crusade creates a very real problem of low-skilled workers having trouble finding a job at all."


    Some believe that the poor benefit from minimum wage increases, and thus such increases function as antipoverty measures.

    a. Some 80% of all minimum wage workers live in not-poor households. http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/75xx/doc7527/93doc06b.pdf

    b. …with almost 20% of these households earning incomes above $50,000. Robert R. Nathan, “The Impact of Increasing the Minimum Wage o Employment in Retailing,” p. 17

    c. More than 50% of minimum wage earners are between 16 and 24-years old. Who Earns Minimum Wage? A Statistical Profile

    d. Some 60% work part-time. Mandating Higher Unemployment - Forbes.com

    e. “…nearly two-thirds of minimum wage workers moved above the minimum wage within one year of working at the minimum wage.” Rising Above The Minimum Wage | EPI Study

    f. Only 5% of all working adults are paid minimum wage. Characteristics of Minimum Wage Workers: 2009
     
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  6. Widdekind
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    i offer, that there is no single labor market. Rather, there are a panoply of sector-specific labor markets. Over-simplifying, there exists an "unskilled" labor market, and a "skilled" labor market. Minimum Wages impinge upon the former; Union Wages impinge upon the latter. Thus, there exist more price floors, than merely (so-called) "Minimum" Wages. Across the labor markets, at all wage-levels, political forces artificially require increased wages, and artificially impinge upon employment & productivity
     
  7. The Rabbi
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    The Rabbi Diamond Member

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    OK. That doesn't contradict anything I wrote. Thanks.
     
  8. Rshermr
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    Rshermr VIP Member

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    I think that you all should take jobs below the minimum wage. See how it works for you.

    Then try and wonder whether you will be able to bargain, as a single laborer, with those corporations who have largely monopoly control over the labor market.

    And wonder, why it is, that the middle class keeps shrinking and shrinking as your favorite politicians try to keep the minimum wage as small as possible.

    And explain to me why I should worry about a company that feels it can not pay the minimum wage.
     
  9. The Rabbi
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    The Rabbi Diamond Member

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    You shouldn't worry at all.
    Now explain why it's OK to lock out people from the labor market and make them unable to gain experience, throwing them into perpetual government dependence.
     
  10. California Girl
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    You seem to completely overlook the reality of 'action and consequence'. I am completely supportive of decent wages, but the cost of that is that prices go up, or those jobs go overseas to countries where production is cheaper - like China. The reason that so much of our production left this country is because they could not compete with foreign manufacturing.

    Every action has a consequence. I'm happy to pay higher prices to buy products made in this country. If you have an Apple product, or Nokia, or LG, or any other mobile technology product other than BlackBerry, then you do don't care where your products are produced. You are part of the problem. Don't pretend you want a solution.
     

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