The Perils of the Minimum Wage
Minimum wage laws are the most anti-employment legislation a government can create. The labour market, supply of and demand for labour, will determine the proper wage for entry level employment. But that is never good enough for vote deficient political leaders and the special interests concealed behind them. Why let markets work when there are votes to be bought? Thus, politicians and their obliging public servants pander to certain groups with costly and intrusive laws that in this case result in less employment and greater dependency upon our big and invasive government machine.
It is strange that the favoured groups in the case of Minimum Wage Laws are not the poor, unskilled, or unemployed. Rather they are unions, especially public service unions, that seek to shield their members from labour competition offered by those willing to work for less. It is not any honest consideration of those less fortunate that spurs mercenary politicians to act, but rather the persuasion and financial inducements of those representing more fortunate wage recipients, who earn far in excess of minimum wages and wish to keep it that way.
Most people do not earn a minimum wage. Only 4 or 5% of the labour market may do so. Most of those earning that rate are young people and students, who often live with their parents. They work here and there primarily for some spending money.
Arbitrarily raising wage rates increases the single greatest cost for a small business — labour. Many firms and small businesses, unable to operate with these mandatory and elevated costs, cut back wherever they can or simply shut their doors. I remember one restauranteur telling me that the one making the most money at his business was the waitress.
As one may surmise, the burden of this wage interference also falls heavily on youth seeking entry level employment. In Manitoba in 2006, the unemployment rate among non-aboriginal youth aged 15 to 24 was 9.1%, far greater than the average across all ages of 4.2%. The youth rate for those identifying as aboriginal, on and off reserve, was staggering at 37.6%. The rate for Metis youth was 15.4%. The situation did not improve with the 2011 figures.
The public primary and secondary education system in Manitoba, among the most costly in the nation, have failed a number of its pupils. They generate high school graduates that on average are almost dead last by most educational measures in this country. And Canada’s education standards are in serious decline compared with other nations. This leaves a large fraction of Manitoba’s high school graduates, if one manages to remain until graduation, in a deprived state.
Metis and aboriginal students are among those hardest hit. They graduate at rates far inferior to other students, approximately 57%, consequently leaving them to lives of meagre wages, poor living conditions, substandard housing, social ills, etc. In 2005, 50% of aboriginal people aged 15 years or older did not possess a certificate, diploma, or degree whereas 26% of non-aboriginals did not. When those identifying as Metis are removed, the rates among aboriginals without a diploma, degree or certificate rise to 65% for men and 58% for women.
Faced with the dismal failure of large fractions of its students, the Manitoba public school system conveniently declares the source of these grave delinquencies beyond its lavish capacity and resources, and abandons these people.
Failed by the school system, the best remedy for a poor education is work experience. A little practical on-the-job experience will improve upon shortcomings in knowledge and education. Competing on wage is the only avenue the unskilled and unemployed possess. However, the minimum wage rate in the province of Manitoba, almost the highest in the country, bars this needed option. Most employers cannot afford to train anyone at such a high wage rate. If they do, then a trainee, so armed with experience may move on to better prospects and wages. Therefore, employers take the best candidates, those with experience, education, credentials, and ignore the others.
For those in need of social and financial assistance, governments welcome and reward their new prisoner with a meagre flow of funds and services designed to lock them and their present or future families into poverty and hardship for the rest of their lives. If one should manage to secure a low paying or part time job, the province taxes earnings, after negligible allowance, at 100% by equivalent reduction in social assistance funds. Such harsh dealings of those seeking to escape their miserable predicament must ensure with rare exception a life of near destitution and perpetual dependence upon the state.
Firstly, we do not believe it is the government’s place to force those in search of job experience and the firms that may employ them to agree to terms that they cannot. If on-the-job training can only pay $7 per hour, then either its $7 or no job. It is not the state’s choice. It is solely the decision of the two contracting parties. They know best their situation, and they will judge accordingly.
By allowing parties to settle on whatever training wage they wish for whatever length of time they wish, those in need of work experience will be able to obtain it with a minimum of interference from the authorities and greatly improve their chances in life. Employers gain trained workers at a price they can afford.
Secondly, for those on financial assistance, any earnings derived from training or employment will no longer be taxed at 100%. If one receives $600 per month from the state and $100 in employment earnings during that month, no longer will the full $100 be deducted from their social assistance income.
Let us say that the average income for a single person is $1200 per month in some area and that the state provides an unemployed person with $600/month in social assistance. If that person should earn $700 throughout the month, then $350 (50% of 700) will be deducted from their social assistance payment. This leaves the person with $700 in earnings plus $250 (600 – 350) in social assistance income for a combined income of $950.
If the person should earn $1300, then the person will have earnings of $1300 and $0 in income from social assistance (600 – 50% of 1300, or 600 – 650, or simply $0) for a total income of $1300. The figures of average income will vary depending upon the size of one’s family and one’s location, but there will be an incentive to lessen one’s dependence upon others, leaving us all better off.
By not fully penalizing those who wish to extricate themselves from meagre living conditions, the financial burden upon the taxpayer will diminish as able people find their productive pursuits properly rewarded.
Aside from training wages, It is our firm belief that the Government of Manitoba should review its heavy and ruinous involvement in setting minimum wage rates in the labour markets. How that is achieved is open to debate, but the present laws cannot remain. By raising the remuneration of entry level labour by government dictate, the number of those seeking employment will multiply while the supply of jobs declines, creating a classic and enduring shortage of employment.
The most vulnerable among us, those with poor education and poor prospects, need work experience to improve their chances in life. Crafting laws that interfere or deprive them of that work experience leaves them far worse off.
Entry level wages are not designed to furnish the recipient with a comfortable life. They are intended to settle on a wage commensurate with one’s level of experience and knowledge relative to his or her rivals in the always changing labour markets. Artificially raising the cost of labour may encourage those with lesser ability or education to feel more secure in that inadequate state should they retain a job. However, it will not be until the greater costs of life arrive in marriage, family expenses, and housing costs that they realize how little more, if anything, they can demand from employers.
If one’s education and experience is lacking, deficient wages are a signal that improvement is urgent. Imposing minimum wages only conceals a problem easily dealt with while creating a great many more.
For those in disagreement we are always open to reconsider our position given the right argument.
In the video below is a magnificent exposition of the grave problems created by minimum wage laws. Milton Friedman, one of the very best free market economists, discussed this issue with some prominent leaders of business and labour some 30 years ago. He and his like-minded peers outline why it harms the poorest among us and benefits the unions and their privileged members.
And below is an excellent article by Mark Perry of the American Enterprise Institute that may be found here:
Now that Obama’s calling for a 24% increase in the minimum wage to $9 per hour, it might be instructive to review what happened the last time the minimum wage was increased – from $5.15 per hour in 2007 to $7.25 in 2009 (in three stages, see chart). Those most affected by increases in the minimum wage are the least skilled, least experienced, and least educated workers, i.e. teenage workers. As the Wall Street Journal pointed out in 2010:
“A higher minimum wage has the biggest impact on those with the least experience or the fewest skills. That means in particular those looking for entry-level jobs, especially teenagers. And sure enough, as nearly all economic models predict, the higher minimum has wreaked havoc with teenage job seekers, well beyond what you would expect even in a recession.”
And that’s exactly what happened when the minimum wage rose by 41% between 2007 and 2009 – it had a disastrous effect on teenagers. The jobless rate for 16-19 year olds increased by ten percentage points, from about 16% in 2007 to more than 26% in 2009. Of course, the overall US jobless rate was increasing at the same time, from about 5% to 10%. Therefore, the graph attempts to better isolate the effects of the minimum wage increases between 2007 and 2009 on teenagers by plotting the difference between the teenage jobless rate and the overall jobless rate, i.e. “excess teen unemployment,” and the minimum wage.
During the 2002-2007 period when the minimum wage was $5.15 per hour, teenage unemployment exceeded the national jobless rate by about 11% on average. Each of the three minimum wage increases was accompanied by a 2 percentage point increase in the amount that the teenage jobless rate exceeded the overall rate, from 11 to 13% after the 2007 increase from $5.15 to $5.85 per hour, from 13% to 15% following the second hike to $6.55 per hour, and from 15% to 17% following the last increase to $7.25. The 17.5% “excess teen unemployment” in October 2009 was the highest on record, going back to at least 1972, and was almost 5 percent higher than the peak teen jobless rate gap following the last recession (12.7% in June 2003).
Bottom Line: Artificially raising wages for unskilled workers reduces the demand for those workers at the same time that it increases the number of unskilled workers looking for work, which results in an excess supply of unskilled workers. Period. And another term for an “excess supply of unskilled workers” is an “increase in the teenage jobless rate.” Despite the wishful thinking of politicians like President Obama, the laws of supply and demand are not optional. The recent history of raising the minimum wage demonstrates its disproportionate negative effect on the least skilled, least experienced and least educated workers – teenagers. And if the minimum wage is raised to $9 per hour, we can expect further increases in teenage joblessness, which can have long-term consequences that might adversely affect teenagers throughout their lifetimes. Here’s how the WSJ explains that possibility:
“Most readers remember the work habits they learned from their first job. Showing up on time, being courteous to customers, learning how to use technology—such habits are often more valuable than the actual paycheck. Studies have confirmed that when teens work during summer months or after school they have higher lifetime earnings than those who don’t work. So raising the minimum wage may inadvertently reduce lifetime earnings.”