The Minimum Wage and Quinn’s First Law

Posted by Jason | Posted in Economics | Posted on 26-11-2009

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Price fixing in any form only harms those people they are supposed to help. On his Nightly Business Report blog, Steven Horwitz, calls on Obama to heed the economic science of the minimum wage.

Economic theory predicts that raising the minimum wage will cause those employees who are least productive to lose their jobs. If we raise the minimum wage from, say, $6 to $7, it’s the same thing as saying “any worker who cannot produce $7 worth of value each hour is not worth hiring.” Younger workers are, of course, among the least skilled in the economy. In addition, thanks to poor schools and historical discrimination, young workers of color are over-represented in this category. Higher minimum wages should disproportionately affect young workers and especially ones of color.

The empirical evidence to support this theoretical claim is abundant. Hundreds of studies of this relationship have been done by economists and they are nearly unanimous that higher minimum wages are associated with some level of increased unemployment among lower-skilled workers. Whatever consensus there might be among climate scientists about global warming, that among economists about minimum wage laws is at least as great (and, as we discovered recently, we don’t need to rig the computer code to make our models reconstruct pre-historic data to come out the way we want). Despite what the science says, the Obama Administration supported a minimum wage increase last July.

The results are as theory predicts: unemployment among whites age 16-19 is at by far the highest rate in 10 years: 25.3% in October, up 28% from 6 months earlier and 36% from a year ago. Among African-Americans of the same age group, the unemployment rate is an intolerable 41.3%, up 19% from April and up 25% from a year earlier. The Hispanic or Latino youth unemployment rates are 35.6% (October), 26.5% (April), and 28.3% (October 2008).

The recent increases in the minimum wage cannot explain all of this increase, as unemployment rates have climbed across the board. However, the overall unemployment rate last April was 8.9% compared to 10.2% today. That’s a 14.6% increase, notably less than the increase in the unemployment rate for young people of any race. So a good chunk of those youth unemployment increases are not just a by-product of the general increase.

If Obama really wants to take science seriously and live up to his promise of being the president for all of America, he could start by asking Congress to repeal the recent increases in the federal minimum wage and thereby give young workers something to really be thankful for this time of year: a much better chance at an entry-level job in an increasingly difficult job market.

via XChange – The NBR Blog.

Again, whether a price ceiling or a price floor, only harm is caused. Also, the harm isn’t felt just by the person who loses the job. The rest of society loses out on the production that would have otherwise been created. Even though it may be a lesser value of production, it is still production. For example, say you have a landscaping company. You pay your student workers, that are off on summer break, $6 an hour. With the rates you are charging, you are able to capture 100 clients. With the revenue from those 100 clients, you have a budget to fund four grass cutters. Now, the minimum wage gets forced up by the government to $7 an hour. Well, now you still have the same rates coming in from 100 clients, but you no longer have the same budget. You have three options. You can layoff one of your guys, you can raise prices or you can cut costs elsewhere. If you lay off one of your guys, how are you going to do the same volume? If you raise prices, demand will go down? If demand goes down, you don’t need the same amount of lawn boys, so you’d end up laying one off anyways. Cutting costs elsewhere only helps if you were¬† inefficient in the first place. If you were inefficient, you would have been charging too much and not had as many clients to begin with. Also, there typically isn’t tons of overhead in minimum wage jobs, so the chances of cutting your way out of it to save jobs is very slim. This leaves us really two options, both of which results in lost jobs. On top of that, both lead to a reduced amount of customers having their demands met. Only the ones who can afford it will continue to have their lawns attended to. Typically, they are smeared as the rich. So, while the regular Joe might have been able to afford the luxury of having his lawn cut previously, he now cannot, thus hurting the regular Joe and the young worker.

Here in Pittsburgh, our local talk radio personality, Jim Quinn, has what he calls Quinn’s first law. Qinn’s first law is “liberalism creates the exact opposite of it’s stated intent”. I’ve tried finding examples of when this doesn’t hold, but I have yet come up with one.

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