Mannkal Economic Education Foundation

Mannerisms

Minimum wage laws! More harm than good?

Ron Manners

6 June 2013

Check out the author's latest book at www.HeroicMisadventures.com

Based on a submission to the Western Australian Industrial Relations Commission

Here are a few thoughts for members of your Commission, as they deliberate increasing (or decreasing) the Minimum Wage for 2013.

 

The economics of Minimum Wage Laws:

There may be more intellectually discredited arguments than those for minimum wages.  However, it is not easy to find them.  The only ones which come immediately to mind are the arguments for affirmative action.

Most economists, in fact, dislike minimum wage laws, for excellent reasons.  They agree with Paul Samuelson, Nobel Prize – Winner and author of a famous text book, that an unskilled black youth is adversely affected by a law which says he must be paid $10 per hour – if that requirement actually keeps him out of a job.  This has for long been common cause amongst economists.

 

Minimum Wages destroy jobs:

Another Nobel Laureate, George Stigler, in 1946 provided a classic analysis of the adverse effects of minimum wage legislation.  First, while wage rates in sectors covered by the law would rise, total wages in these sectors would fall and unemployment and poverty would increase.  Second, unless the minimum wages were somehow targeted at the poor, there was not guarantee that they would not be paid to people from wealthier households.  Third, the sectors not covered by the law would face an increased supply of labour and wages would therefore fall, offsetting gains in the covered sector.  Nor would a National Minimum Wage do any good, it would simply increase national unemployment.

 

Do Minimum Wages ever do any good?

Empirical studies have since confirmed Stigler’s analysis.  So much so that a third winner of the Nobel Prize, Milton Freidman, has argued for government aid to help the poor through income support in the form of subsidies and not through wage laws.  Minimum wages, Friedman held, normally benefit the wrong people and only make the poor worse off.

 

Where has support for Minimum Wage Laws originated?

Minimum Wage Laws promote ‘feather-bedding’, of employers and trade unions.

Employers and unions, often with an inclination to cartel-maintaining behaviour, lobby for the maintenance of industrial and wage councils for the benefit, not of the public, but of their own individual members.

In a 1995 paper, development economist, Prof. Deepak Lal concluded that, “despite the passion aroused, the text book conclusion with which we began —  that the Minimum Wage is an inefficient, well-intentioned but ‘inexpert interference’ with the mechanisms of supply and demand  — still stands.”

 

More recent data

So what has happened since some of these ‘historic studies’?

In September 15, 1997 David Card and Alan Kruger produced a book, Myth and Measurement, in an attempt to show that minimum wage laws not only didn’t harm employment prospects for low-wage workers, but also promoted increases in employment.  These findings were later exposed as being unreliable by authors David Neumark and William L. Washer in their August 13, 2010 book, Minimum Wages (The MIT Press).

Neumark and Washer showed that the data in the Card / Kruger book used insufficient data sampling, which was also inaccurate (focusing solely on the fast-food industry in only one U.S. State).  The Neumark / Washer book, Minimum Wages, covers the outcomes of most of the leading studies in this field and comprehensively shows that the Minimum Wage Laws do have harmful impacts on society.

They conclude their book with three significant points:-

 

- An increase in Minimum Wage leads to a reduction in employment opportunities for low-skilled and directly affected workers.

- There is no evidence that Minimum Wages reduce the proportion of families with income near or below the poverty line.

- Minimum Wages impede skill acquisition by reducing educational attainment and training, resulting in lower adult wages and earnings.

 

Their conclusion was that support for Minimum Wage legislation rests upon moralistic, rather than economic grounds.

This book was found helpful in the recent deliberation on Minimum Wages in Hong Kong.

May we commend the perusal of this book to your Commission members as ultimately it could help facilitate your current debate by providing evidence-based information, separately subjective bias from real facts.

 

Suggested links which form part of this submission:

  • Why would an economic liberal set minimum wages? (An interesting 2009 account, by Prof. Ian Harper, former Chairman of the Australian Fair Pay Commission):

http://www.cis.org.au/images/stories/policy-magazine/2009-summer/25-4-09-ian-harper.pdf

  • Mannkal scholar, Conrad Karageorge, 2012 video presentation to the Hong Kong Legislative Committee:

http://www.youtube.com/watch?v=kucCAIH6Zbw&feature=youtu.be

  • The $19k Employment Exclusion Zone - The HR Nicholls Society

http://www.mannkal.org/downloads/submissions/sub20130426.pdf

  • Submission to Fair Work Commission – The H.R. Nicholls Society

http://hrnicholls.com.au/2013/04/minimum-wage-submission/

Ron Manners

2 Responses to “Minimum wage laws! More harm than good?”

  1. Hi Ron,
    This is a good article. Thanks.
    I had come to the same conclusion myself, but I did not have much data to back up my conclusions, except the observation that the minimum wage in California, as of 2012, was still very low, i.e., about $7.50 per hour. I compared that to the years when I was living and working in California in 1979-80, 33 years ago, and charging $8.00 per hour. Many people told me then that I was charging far too little and should increase my rates.
    Thanks and regards
    Mike

  2. Luke McGrath says:

    Ron,

    The WA government may not be so wise, but it looks as though the Bank of Spain at least has taken some notice of your recent submission on minimum wage laws!
    http://elpais.com/elpais/2013/05/31/inenglish/1370013481_405760.html

    Also, for those interested, here are a few links from economist Benjamin Powell on the minimum wage that appeared a few months ago in an issue of the Independent Institute’s newsletter: http://www.independent.org/publications/the_lighthouse/detail.asp?id=486#2408