Raising the minimum unemployment rate

Minimum wage hike will penalize those it supposedly is intended to benefit

By Geoffrey Lawrence
  • Friday, June 26, 2009

This is a time of serious economic recession in Nevada.  Out of every 100 workers in the Silver State, 11.3 are currently unemployed.  Yet, the federal government appears to think that is not enough and is driving for a change that will wind up putting even more people out of work.

In order to comply with a forthcoming hike in the federal minimum wage rate, the State of Nevada will raise its official minimum wage on July 1 from $5.85 to $6.55 for businesses that provide approved health benefits and from $6.85 to $7.55 for businesses that do not.

Advocates of minimum wage laws ignorantly argue that these price controls on low-skilled labor will benefit those in society who earn the least.  They further claim that mandating higher incomes for low-skilled workers through legislation will have a cascading effect through the economy as those workers use their new disposable income to spur consumption. 

Unfortunately, these claims are patently false.  There is wide consensus among economists of all schools that minimum wage laws injure the very people they are supposed to benefit — low-skilled workers.

The reality is that income is simply a function of productivity.  In a market economy, individuals are paid in direct proportion to the value of what they produce.  If this was not the case and a worker was paid a wage that fell short of the value of his production, that worker would simply be bid away by a competing firm.  Hence, over the long haul, all workers tend to get paid according to their level of productivity.

Indeed, the only reason a worker would have to accept less than his value is if some market distortion restricts competition — such as a government-run or government-protected monopoly.  It is no accident that the federal minimum wage first appeared during the Great Depression when both the Hoover and Roosevelt administrations were trying to "keep prices up," with legal mandates that continually damaged and disrupted the natural market processes that otherwise allow private industry to create jobs.  Because there was little popular understanding of the damage such government laws produce, the economic stagnation of the Great Depression persisted all through the 1930s, with millions of American workers paid less than their marketable skills would have yielded in a freer economy. Although the New Dealers always spouted much rhetoric about "exploitation," it was actually their own policies that systematically abused the great mass of American labor.

When government policy intrudes upon the competitive wage-setting mechanism of the market by requiring that some workers be paid more than their labor is worth, these employees, other things equal, are the first to be laid off.  Workers who are already earning higher wages are doing so precisely because their unique skills and productivity levels merit the higher pay rates.

In fact, in the long run it isn't even possible to pay workers in excess of the value of their production.  That's because individuals cannot consume products that have not been created.  A subsistence farmer cannot decide that his family should eat 1,000 tomatoes a year regardless of how hard he works.  If he does not grow 1,000 tomatoes, his family cannot eat 1,000 tomatoes. 

This lesson applies to an advanced economy as much as it does to the simple economy of a subsistence farmer.  While workers in an advanced economy do not necessarily eat what they produce, they use their income as a means of trading what they have produced — such as clothing — for the goods and services that others have produced including food, housing, financial services, etc.  If the total amount paid to workers were to exceed the total amount of goods and services produced, that would translate into a massive destruction of goods and services — an instance of "eating the seed corn" on a massive scale. Because there is no escape from these realities, minimum wage requirements must result in higher unemployment — most likely, among those already paid the least.

During this time of economic recession, the impact of a minimum wage increase will be particularly pronounced.  By pricing more workers out of the job market, a minimum wage increase will spawn an even steeper decline in output — exacerbating economic recession rather than facilitating recovery.

When government officials impose price and/or wage controls on private markets, they are displaying the depth of their ignorance.  Wise lawmakers would allow the market to set prices for labor as well as for final goods and services.  Yet, Nevadans will soon pay for the failure and arrogance of lawmakers who pretend to know better than the market.

Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute.

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