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Sunday, August 21, 2011

End All Minimum Wage Laws By Chuck McGlawn


The statement of a “Greedy Capitalist”, or is it a step toward more freedom? In this, the “Age of Polarization”, if you are generally called a liberal or progressive you accept the first answer. If you are called a conservative or a Tea Partier you would favor the second. If you were an economist of either stripe, you may say neither, followed by, “However, minimum wages do increase unemployment.”

OK, if almost every economist agrees and it is a given that laws that increase the minimum wage always increases unemployment. Then, on what segment of the labor force does it have the most effect. The answer to that question is a surprising, “it affects the least skilled, and then every skill level above the least skilled.”

It is easy to conceptualize that when minimum wage laws raise the minimum wage some of the least skilled workers may lose their jobs, even if the job is the least demanding menial tasks. Employers may think some of their employees and the jobs they do are not worth the mandatory wage raise. However, it is also true that the job they had been doing may still occasionally need doing. This means a more skilled employee is pulled off his more productive activity to do the menial jobs occasionally.

As occupants of more skilled levels must move downward, it follows that employees of the next higher skill level will be moved downward to fill in for work not completed by the lower skilled.

Let’s turn this thinking upside down, with a simple thought experiment. We are going to imagine just one company and one job center. There 100 people employed at four skill levels: 10% at the lowest skill level, 60% employed at the second level, 20% at the third level and top management constitutes the upper 10%. There is a minimum wage in effect. The company is able to compete in the marketplace. The product or service they provide or produce is selling at a level that provides enough profit to keep the investors satisfied. There is at every skill level one employee that is ready and eager for promotion but is held back because management is not sure the increased cost added to the increased production the result of four promotions are executed will have a market. In this thought experiment we are dealing with very high unemployment rate for certain segments of the population. It is as high as 50% for high school dropouts especially minorities. The reason for high unemployment are the minimum wages that must be paid. This prevents a willing buyer of labor and a willing seller of labor to connect because government prevents it.

Into this mental exercise let us eliminate the minimum wages. Now the willing buyer can contract with the willing seller and a single low skilled person is hired. This will free up the most skilled at every level to be promoted to the next level. Increased production  with very little increase in production cost making the company more profitable. In this example four people are gaining skills and experience not available to them when minimum wage laws prevent the lowest skilled from ever getting a job to get these experiences.

1 comment:

Don Patterson said...

As usual, Chuck is right. The more the minimum wage is raised by the government, the more unemployment we see. As a result we have folks on welfare buying goods made in China where there is probably no minimum wage. When the welfare checks run out after a couple of years our people, including vets, are out on the street.