The Invisible Victims

By Doug French
  • Monday, October 11, 2004

A recent poll found that two-thirds of the respondents intend to vote for the proposed increase in Nevada’s minimum wage from $5.15 to $6.15 per hour on November 2nd.

Unfortunately, those who vote “yes” on Question 6 will be harming the very people that the initiative is supposed to help.

The AFL-CIO is backing the “Raise the Minimum Wage for Working Nevadans” initiative, which in addition to raising the minimum wage by over 19 percent, would also tie Nevada’s wage to future hikes in the national minimum wage and allow annual cost-of-living increases of up to three percent.

Minimum wage laws have been displacing low-skilled and low-wage workers since the National Recovery Act (NRA) established minimum wages in 1933 for 515 classes of labor. Most of the wage rates were set between 30 and 40 cents per hour ($3.87 to $5.16 in today’s dollars). The NRA’s minimum wage put thousands out of work, primarily “the young, inexperienced worker and the old worker,” wrote Benjamin M. Anderson in Economics and the Public Welfare.

The NRA and its minimum wage codes were ruled unconstitutional in 1935 by the Supreme Court, but returned to stay in 1938 with Roosevelt’s Fair Labor Standards Act. The economic effects of the minimum wage are irrefutable. After over 65 years of evidence, “the question is no longer if the minimum wage law creates unemployment,” wrote Thomas Rustici in a Cato Journal article entitled “A Public Choice View of the Minimum Wage,” “but how much current or future increases in the minimum wage will adversely affect the labor market.”

Substitution is a fact of life in economics. Low-skill, low-wage workers are substitutes for high-skill, high-wage workers. Labor competes against labor, not against management. And since low-skill workers compete against high-skill workers, minimum wage laws work against the lower-skilled, lower-paid worker in favor of the higher-paid workers.

Economist Walter Williams in his book, The State Against Blacks, explains that if a fence can be erected by either using one skilled worker costing $38 per day, or three unskilled workers costing $13 each per day, a firm will use the skilled worker because the cost is less ($38 versus $39). Williams points out that skilled workers soon realize that if minimum wage laws are enacted to say $20 per day (for this example), then the skilled worker can then demand up to $60 per day without losing his job. “Thus the effect of the minimum wage is to price the high-skilled worker’s competition out of the market,” Williams summarizes.

Thus the unions that represent highly skilled workers are the major supporters of minimum wage laws: as is the case in Nevada this year with the AFL-CIO backing Question 6.

Professor Williams points out that because unions support reducing employment opportunities, these organizations also support government public assistance programs. “Income subsidy programs have disguised the true effects of restriction created by unions and other economic agents by casting a few crumbs to those denied jobs in order to keep them quiet, thereby creating a permanent welfare class,” writes Williams.

The worst outcome of minimum wage laws is the deprivation of first-time job opportunities to young workers. When minimum wage laws are set above low-skilled workers’ marginal productivity, employment is restricted. Thus teen and marginal workers are priced out of the labor market and lose their first, most critical chance to accumulate the human capital that would make them valuable to future employers.

Economist Martin Feldstein finds minimum wage laws ironic: “It is unfortunate and ironic that we encourage and subsidize expenditure on formal education while blocking the opportunity for individuals to ‘buy’ on-the-job training.”

The do-gooders (as Professor Williams calls them) who support minimum wage laws never see these discouraged kids who become permanent welfare recipients.

The do-gooders will see the workers who are still employed and bringing home more money. But older workers and young workers will be left without jobs. “These are the invisible victims of the do-gooders’ actions,” writes Williams. “Often the causes are invisible to the victims themselves: they do not know why they cannot find a job.”

Low-wage people are not so much underpaid, as they are under-skilled. These workers need to obtain more job skills and do that by working. Nevada voters cannot declare on November 2nd that everyone’s output is now worth $6.15 per hour. In the words of Professor Williams: “This makes about as much sense, and accomplishes about as much, as doctors curing patients by merely declaring that they are cured.”

Doug French is executive vice president of a Southern Nevada bank and a policy fellow of the Nevada Policy Research Institute.

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