The fallacy of the minimum wage has reared it’s ugly head yet again!
Progressive political blog Think Progress announced on Wednesday that San Francisco will be the first US city to have a minimum wage above $10. Citing the Economic Policy Institute, they wrote:
There are eight states that have legislated annual, inflation-linked increases in their minimum wage. This “indexing” of the minimum wage ensures that the real value of the lowest-paid workers’ wages does not shrink as normal costs of living go up. On Jan. 1, 2012, minimum-wage workers in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont, and Washington will all see an increase in their paychecks.
Can’t argue with that. Indeed, an inflation-adjusted minimum wage does ensure that the lowest-paid workers’ wages do not shrink proportional to costs of living. They continued:
Across these eight states, an estimated 1,045,000 will be “directly affected.” These are workers whose current wages are between the existing state minimum wage and the new Jan. 1 minimum wage. In addition, another 394,000 workers will be “indirectly affected” by the increase. These indirectly-affected workers are those whose current wages are just above the new Jan. 1 minimum, and are likely to also see a wage increase as employers adjust their overall pay structures to reflect the new minimum (the “spillover” effect)…The extra money pumped into the economy by the increases should also create about 3,000 jobs.
While I’m skeptical as to how the EPI came up with those numbers, I can agree with this as well. Workers will be affected, and some may even see a wage increase. But what this report fails to consider are the many low-wage workers who will lose their jobs because of the increase. Raising the minimum wage equates to outlawing employment at wage rates below that of the legal minimum. For those workers in San Francisco whose marginal product of labor is not greater than or equal to $10 an hour, the new minimum wage is unfortunate indeed, as such workers will be laid off and forced to find work somewhere else…where minimum wage laws do not prevent them from obtaining employment. Murray Rothbard puts it best:
All demand curves are falling, and the demand for hiring labor is no exception. Hence, laws that prohibit employment at any wage that is relevant to the market (a minimum wage of 10 cents an hour would have little or no impact) must result in outlawing employment and hence causing unemployment.
If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to disemploy, permanently, those who would have been hired at rates in between these two rates. Since the demand curve for any sort of labor (as for any factor of production) is set by the perceived marginal productivity of that labor, this means that the people who will be disemployed and devastated by this prohibition will be precisely the “marginal” (lowest wage) workers, e.g. blacks and teenagers, the very workers whom the advocates of the minimum wage are claiming to foster and protect.
The chart below, also from Rothbard, shows that a minimum wage higher than the market-clearing rate leads to what is literally government-induced excess supply of labor (or, put more simply, the permanent unemployment of all workers whose marginal productivity is less than the legal minimum wage).