Basic Economics

  In Germany, such benefits accounted for half of the average labor cost per hour. By comparison, such benefits accounted for less than one-fourth the average labor costs per hour in Japan and the United States.{345} Average hourly compensation of manufacturing employees in the European Union countries in general is higher than in the United States or Japan.{346} So is unemployment.

  Comparisons of Canada with the United States show similar patterns. Over a five-year period, Canadian provinces had minimum wage rates that were a higher percentage of output per capita than in American states, and unemployment rates were correspondingly higher in Canada, as was the average duration of unemployment, while the Canadian rate of job creation lagged behind that in the United States. Over this five-year period, three Canadian provinces had unemployment rates in excess of 10 percent, with a high of 16.9 percent in Newfoundland, but none of the 50 American states averaged unemployment rates in double digits over that same five-year period.{347}

  A belated recognition of the connection between minimum wage laws and unemployment by government officials has caused some countries to allow their real minimum wage levels to be eroded by inflation, avoiding the political risks of trying to repeal these laws explicitly, when so many voters think of these laws as being beneficial to workers. Such laws are in fact beneficial to those workers who continue to be employed—those who are on the inside looking out, but at the expense of the unemployed who are on the outside looking in.

  Labor unions also benefit from minimum wage laws, and are among the strongest proponents of such laws, even though their own members typically make much more than the minimum wage rate. There is a reason for this. Just as most goods and services can be produced with either much labor and little capital or vice versa, so can most things be produced using varying proportions of low-skilled labor and high-skilled labor, depending on their respective costs, relative to one another. Thus experienced unionized workers are competing for employment against younger, inexperienced, and less skilled workers, whose pay is likely to be at or near the minimum wage. The higher the minimum wage goes, the more the unskilled and inexperienced workers are likely to be displaced by more experienced and higher skilled unionized workers.

  Just as businesses seek to have government impose tariffs on imported goods that compete with their own products, so labor unions use minimum wage laws as tariffs to force up the price of non-union labor that competes with their members for jobs.

  Among 3.6 million Americans earning no more than the minimum wage in 2012, just over half were from 16 to 24 years of age—and 64 percent of them worked part-time.{348} Yet political campaigns to increase the minimum wage often talk in terms of providing “a living wage” sufficient to support a family of four—such families as most minimum wage workers do not have, and would be ill-advised to have before they reach the point where they can feed and clothe their children. The average family income of a minimum wage worker is more than $44,000 a year—far more than can be earned by someone working at minimum wages. But 42 percent of minimum-wage workers live with parents or some other relative. In other words, they are not supporting a family but often a family is supporting them. Only 15 percent of minimum-wage workers are supporting themselves and a dependent, {349}the kind of person envisioned by those who advocate a “living wage.”

  Nevertheless, a number of American cities have passed “living wage” laws,{350} which are essentially local minimum wage laws specifying a higher wage rate than the national minimum wage law. Their effects have been similar to the effects of national minimum wage laws in the United States and other countries—that is, the poorest people have been the ones who have most often lost jobs.

  The huge financial, political, emotional, and ideological investment of various groups in issues revolving around minimum wage laws means that dispassionate analysis is not always the norm. Moreover, the statistical complexities of separating out the effects of minimum wage rates on employment from all the other ever-changing variables which also affect employment mean that honest differences of opinion are possible when examining empirical data. However, when all is said and done, most empirical studies indicate that minimum wage laws reduce employment in general,{351} and especially the employment of younger, less skilled, and minority workers.

  A majority of professional economists surveyed in Britain, Germany, Canada, Switzerland, and the United States agreed that minimum wage laws increase unemployment among low-skilled workers. Economists in France and Austria did not. However, the majority among Canadian economists was 85 percent and among American economists was 90 percent.{352} Dozens of studies of the effects of minimum wages in the United States and dozens more studies of the effects of minimum wages in various countries in Europe, Latin America, the Caribbean, Indonesia, Canada, Australia, and New Zealand were reviewed in 2006 by two economists at the National Bureau of Economic Research. They concluded that, despite the various approaches and methods used in these studies, this literature as a whole was one “largely solidifying the conventional view that minimum wages reduce employment among low-skilled workers.”{353}

  Those officially responsible for administering minimum wage laws, such as the U. S. Department of Labor and various local agencies, prefer to claim that these laws do not create unemployment. So do labor unions, which have a vested interest in such laws as protection for their own members’ jobs. In South Africa, for example, The Economist reported:

  The main union body, the Congress of South African Trade Unions (Cosatu) says joblessness has nothing to do with labour laws. The problem, it says, is that businesses are not trying hard enough to create jobs.{354}

  In Britain, the Low Pay Commission, which sets the minimum wage, has likewise resisted the idea that the wages it set were responsible for an unemployment rate of 17.3 percent among workers under the age of 25, at a time when the overall unemployment rate was 7.6 percent.{355}

  Even though most studies show that unemployment tends to increase as minimum wages are imposed or increased, those few studies that seem to indicate otherwise have been hailed in some quarters as having “refuted” this “myth.”{356} However, one common problem with some research on the employment effects of minimum wage laws is that surveys of employers before and after a minimum wage increase can survey only those particular businesses which survived in both periods. Given the high rates of business failures in many industries, the results for the surviving businesses may be completely different from the results for the industry as a whole.{xix} Using such research methods, you could survey people who have played Russian roulette and “prove” from their experiences that it is a harmless activity, since those for whom it was not harmless are unlikely to be around to be surveyed. Thus you would have “refuted” the “myth” that Russian roulette is dangerous.

  It would be comforting to believe that the government can simply decree higher pay for low-wage workers, without having to worry about unfortunate repercussions, but the preponderance of evidence indicates that labor is not exempt from the basic economic principle that artificially high prices cause surpluses. In the case of surplus human beings, that can be a special tragedy when they are already from low-income, unskilled, or minority backgrounds and urgently need to get on the job ladder, if they are to move up the ladder by acquiring experience and skills.

  Unemployment varies not only in its quantity as of a given time, it varies also in how long workers remain unemployed. Like the unemployment rate, the duration of unemployment varies considerably from country to country. Countries which drive up labor costs with either high minimum wages or generous employee benefits imposed on employers by law, or both, tend to have longer-lasting unemployment, as well as higher rates of unemployment. In Germany, for example, there is no national minimum wage law but government-imposed mandates on employers, job security laws, and strong labor unions artificially raise labor costs anyway. As of the year 2000, 51.5 percent of the unemployed in Germany were unemployed for a year or more, while just 6 per
cent of the unemployed in the United States were unemployed that long. However, as the U.S. Congress extended the period during which unemployment compensation would be paid, the share of Americans who remained unemployed for a year or longer rose to 31.3 percent in 2011, compared to 48 percent in Germany.{357}

  Informal Minimum Wages

  Sometimes a minimum wage is imposed not by law, but by custom, informal government pressures, labor unions or—especially in the case of Third World countries—by international public opinion or boycotts pressuring multinational companies to pay Third World workers wages comparable to the wages usually found in more industrially developed countries. Although organized public pressures for higher pay for Third World workers in Southeast Asia and Latin America have made news in the United States in recent years, such pressures are not new nor confined to Americans. Similar pressures were put on companies operating in colonial West Africa in the middle of the twentieth century.

  Informal minimum wages imposed in these ways have had effects very similar to those of explicit minimum wage laws. An economist studying colonial West Africa in the mid-twentieth century found signs telling job applicants that there were “no vacancies” almost everywhere. Nor was this peculiar to West Africa. The same economist—P.T. Bauer of the London School of Economics—noted that it was “a striking feature of many under-developed countries that money wages are maintained at high levels” while “large numbers are seeking but unable to find work.”{358} These were of course not high levels of wages compared to what was earned by workers in more industrialized economies, but high wages relative to Third World workers’ productivity and high relative to their alternative earning opportunities, such as in agriculture, domestic service, or self-employment as street vendors and the like—that is, in sectors of the economy not subject to external pressures to maintain an artificially inflated wage rate.

  The magnitude of the unemployment created by artificially high wages that multinational companies felt pressured to pay in West Africa was indicated by Professor Bauer’s first-hand investigations:

  I asked the manager of the tobacco factory of the Nigerian Tobacco Company (a subsidiary of the British-American Tobacco Company) in Ibadan whether he could expand his labour force without raising wages if he wished to do so. He replied that his only problem would be to control the mob of applicants. Very much the same opinion was expressed by the Kano district agent of the firm of John Holt and Company in respect of their tannery. In December 1949 a firm of produce buyers in Kano dismissed two clerks and within two days received between fifty and sixty applications for the posts without having publicized the vacancies. The same firm proposed to erect a groundnut crushing plant. By June 1950 machinery had not yet been installed; but without having advertised a vacancy it had already received about seven hundred letters asking for employment. . . I learnt that the European-owned brewery and the recently established manufacturers of stationery constantly receive shoals of applications for employment.{359}

  Nothing had changed fundamentally more than half a century later, when twenty-first century job seekers in South Africa were lined up far in excess of the number of jobs available, as reported in the New York Times:

  When Tiger Wheels opened a wheel plant six years ago in this faded industrial town, the crush of job seekers was so enormous that the chief executive, Eddie Keizan, ordered a corrugated iron roof to shield them from the midday heat.

  “There were hundreds and hundreds of people outside our gate, just sitting there, in the sun, for days and days,” Mr. Keizan recalled in an interview. “We had no more jobs, but they refused to believe us.”{360}

  Why then did wage rates not come down in response to supply and demand, leading to more employment at a lower wage level, as basic economic principles might lead us to expect? According to the same report:

  In other developing countries, legions of unskilled workers have kept down labor costs. But South Africa’s leaders, vowing not to let their nation become the West’s sweatshop, heeded the demands of politically powerful labor unions for new protections and benefits.{361}

  Such “protections and benefits” included minimum wages set at levels higher than the productivity of many South African workers. The net result was that when Tiger Wheels, which had made aluminum wheels solely in South Africa for two decades, expanded its production, it expanded by hiring more workers in Poland, where it earned a profit, rather than in South Africa, where it could only break even or sustain a loss.{362} The misfortunes of eager but frustrated African job applicants throughout the South African economy were only part of the story. The output that they could have produced, if employed, would have made a particularly important contribution to the economic well-being of the consuming public in a very poor region, lacking many things that others take for granted in more prosperous societies.

  It is not at all clear that workers as a whole are benefitted by artificially high wage rates in the Third World. Employed workers—those on the inside looking out—obviously benefit, while those on the outside looking in lose. For the population as a whole, including consumers, it would be hard to make a case that there is a net benefit, since there are fewer consumer goods when people who are willing to work cannot find jobs producing those consumer goods. The only category of clear beneficiaries are people living in richer countries, who can enjoy the feeling that they are helping people in poorer countries, or Third World leaders too proud to let their workers be hired at wage rates commensurate with their productivity.

  While South African workers’ productivity is twice that of workers in Indonesia, they are paid five times as much{363}—when they can find jobs at all. In short, these productive South African workers are not “surplus” or “unemployable” in any sense other than being priced out of the market by politicians.

  As already noted in Chapter 10, South African firms use much capital per worker. This is more efficient for the firms, but only because South African labor laws make labor artificially more expensive, both with minimum wage laws and with laws that make laying off workers costly. “Labour costs are more than three-and-a-half times higher than in the most productive areas of China and a good 75% higher than in Malaysia or Poland,” according to The Economist.{364} With such artificially high costs of South African labor, it pays employers to use more capital, but this is not greater efficiency for the economy as a whole, which is worse off for having so many people unemployed, which is to say, with so many resources idled instead of being allocated.

  South Africa is not unique. A National Bureau of Economic Research study, comparing the employment of low-skilled workers in Europe and the United States found that, since the 1970s, such workers have been disproportionately displaced by machinery in European countries where there are higher minimum wages and more benefits mandated to be paid for by employers. The study pointed out that it was since the 1970s that European labor markets moved toward more control by governments and labor unions, while in the United States the influence of government and labor unions on labor markets became less.{365}

  The net result has been that, despite more technological change in the United States, the substitution of capital for labor in low-skilled occupations has been greater in Europe. Sometimes the work of low-skilled labor is not displaced by capital but simply dispensed with, as the study noted:

  It is close to impossible to find a parking attendant in Paris, Frankfurt or Milan, while in New York City they are common. When you arrive even in an average Hotel in an American city you are received by a platoon of bag carriers, door openers etc. In a similar hotel in Europe you often have to carry your bags on your own. These are not simply trivial traveler’s pointers, but indicate a deeper and widespread phenomenon: low skilled jobs have been substituted away for machines in Europe, or eliminated, much more than in the US, while technological progress at the “top” i.e. at the high-tech sector, is faster in the US than in Europe.{366}

  Just as a price set by government below the free mar
ket level tends to cause quality deterioration in the product that is being sold, because a shortage means that buyers will be forced to accept things of lower quality than they would have otherwise, so a price set above the free market level tends to cause a rise in average quality, as the surplus allows the buyers to cherry-pick and purchase only the better quality items. What that means in the labor market is that job qualification requirements are likely to rise and that some workers who would ordinarily be hired in a free market may become “unemployable” when there are minimum wage laws. Unemployability, like shortages and surpluses, is not independent of price.

  In a free market, low-productivity workers are just as employable at a low wage rate as high-productivity workers are at a high wage rate. During the long era from the late nineteenth century to the mid-twentieth century, when black Americans received lower quantities and lower qualities of education than whites in the South where most lived, the labor force participation rates of black workers were nevertheless slightly higher than those of white workers.{367} For most of that era, there were no minimum wage laws to price them out of jobs and, even after a nationwide minimum wage law was passed in 1938, the wartime inflation of the 1940s raised wages in the free market above the legally prescribed minimum wage level, making the law largely irrelevant by the late 1940s. The law was amended in 1950, beginning a series of minimum wage escalations.

  If low-wage employers make workers worse off than they would be otherwise, then it is hard to imagine why workers would work for them. “Because they have no alternative” may be one answer. But that answer implies that low-wage employers provide a better option than these particular workers have otherwise—and so are not making them worse off. Thus the argument against low-wage employers making workers worse off is internally self-contradictory. What would make low-wage workers worse off would be foreclosing one of their already limited options. This is especially harmful when considering that low-wage workers are often young, entry-level workers for whom work experience can be more valuable in the long run than the immediate pay itself.