Minimum Wage And The Unintended Consequences

Minimum Wage And The Unintended Consequences Image

The Fair Minimum Wage Act of 2007 raised the federal minimum wage in three increments from $5.15 per hour to $7.25 per hour.   The Democrat Party Platform has as one of its key principles a higher minimum wage and regular increases.  This platform is based, in part, on a study by Card and Kruger, which found positive benefits for the minimum wage. 

However, numerous scholarly papers have refuted this claim and show deleterious effects on employment related to increases in the minimum wage.  One paper entitled “The Economics of Minimum Wage Legislation Revisited”1 indicates the following:  “Table 1 should, we think, give pause to those who still hold a 1930’s view of poverty relief.  Save for unrelated individuals, the link between how much a worker earns per hour and the economic well being of his or her household is now almost completely lost – and, along with it, the target efficiency of minimum wage legislation.” 

In another article entitled “Minimum Wage Laws: Economic verses Ideology”2 indicates as follows:  “Economists studies the effects of minimum wages long before Card and Kruger came along, and found that higher minimum wages reduced demand for low productivity labor.”  Many other articles could be cited.   However, Henry Hazlitts’ book “Economics in One Lesson” succinctly sums it up.  The one lesson is: “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”3 (emphasis mine)

Minimum wage laws really are about raising the price for labor inputs into the economy.4  It is quite clear in other aspects of the economy that minimum price laws are harmful to the industries employing them.  Minimum wage laws are no different in their effect.  So in mandating that all workers earn $7.25/hr, those who do not contribute $7.25/hr worth of work to the organization will be without work.  This hurts the employee and the community as that employee is now unemployed and requests the community to support him.  However, at a lower wage, these workers would still be employed with their contribution valued at that lower wage.  Further, the firms providing the higher minimum wages pass on their increased costs in the form of higher prices for their goods and have the consumer pay for it. 

As we shall see in the example below where other organizations have not increased their input costs, wages in this case, competitive marketplace forces will put the kibosh on this plan and higher goods prices will not last in a competitive marketplace.  (Alternatively, if prices did in fact rise, other workers would have to pay more for these inputs and they will suffer losses.)  Therefore, the organization with the increased input costs will somehow have to absorb the costs and take lower profits or reduce them.  Labor is often a significant cost input so raising it often leads to employee layoffs or automation which reduces input costs per unit of output that also leads to reduced employment.   Those who are laid off will necessarily need to work elsewhere in less attractive work and push out those workers.  So the chain goes until the most unskilled worker is out of a job.  Now it is just this most unskilled worker who needs a job to learn new skills to advance into the higher ranks of the employed.  The bottom line here is that any and all economic polices must be scrutinized under Henry Hazlitt’s “Economics in One Lesson” and see if they past the test.  If they do, then they are likely to be of benefit to society, if not then they are deleterious to society as a whole, as is true with The Fair Minimum Wage Act of 2007. 

For example, American Samoa has numerous tuna canning facilities and they paid an average wage of $3.26 per hour at the time of the enactment of The Fair Minimum Wage Act of 2007.  Previously, American Samoa was exempted form said laws as the competition was from Thailand where wages were in the 60 – 75 cents per hour range.  Nearly 2/3 of all canned tuna come to the mainland USA form American Samoa.  This industry is a major employer of people in American Samoa as well.  The leaders in American Samoa, who know the economics of the situation, did not want the minimum wage law to be applied to them.  However,  our distinguished leaders in Washington DC placed into the bill the requirement of wage rate rises in 50 cent increments per year until the $7.25 minimum was met.  Note:  Not all the wage rate rises are even in effect yet.!!

Now for the results5:

Chicken of the Sea closed its tuna canning facility:  Job loses 2014.

StarKist work force reductions: 1800 or 60% reduction by 2011.

Unemployment:  Increased form 10% in 2003 to 30% today.

Many other firms will be leaving or closing by the end of 2010

Real incomes declined by 6% from 2006 – 2008.

Support for minimum wage in American Samoa has plummeted. 

 

Now the outrage:  In the latest approved spending bill, the Democrats allocated 18 million dollars in business tax credits for American Samoa companies.  However, companies like StarKist cannot take advantage of this.  Why?  It is losing money.  Therefore, if something is not done soon, the whole economy of American Samoa will collapse.

Analyzing economic hypotheses under the Scientific Method, effectively sifts these experiments out.  The hypothesis in The Fair Minimum Wage Act of 2007:  Increasing the minimum wage is always beneficial to all the workers in the economy.  As long as it is true, testing continues until increased confidence in the theory is established.  However, testing never stops and once one bon-a-fide negative result is obtained and no other assignable cause can be established, the theory is abandoned as incorrect and a search for another is conducted to explain the phenomena.  Clearly, the American Samoa case is a bon-a-fide result that minimum wage laws are NOT beneficial to all workers, thus, minimum wage laws deserve to be in the trash bin of history by this definition as well!.

In review of the American Samoa case: Increasing the minimum wage, causes companies to become uncompetitive and they close down or reduce employment, the unemployment rate dramatically increases, and the wealth of the people decreases just as Henry Hazlitt predicted! 

In addition, unintended consequences are the importation of tuna from a foreign country.  This negatively affects the balance of trade and the increased unemployment rate means that Washington will have to dole out unemployment checks, beyond the tax grants to businesses that it did not have to do before.  This money will be borrowed money increasing our national debt, which will have to be paid by other taxpayers.  Further, when the company closes factories, the jobs in American Samoa are lost forever, just what we do not need today.  Finally, what is the effect on the people who were workers who now have no enjoyment from working and do not develop new skills but get a hand out instead? 

Wow, Washington should know the unintended consequences if they had listened to the people or knew economics.  Beware of future minimum wage increases; your job may be next in the elimination line.  

Write and let your congressperson know where you stand.  This country is still ruled by the people if we all stand up, fight, and take our country back one elected official at a time!

1)      “The Economics of Minimum Wage Legislation Revisited”  Burkhauser, Richard V. and Finegan Aldrich T., Cato Journal Vol. 13 #! Spring/Summer 1993,  p. 127.

2)      “Minimum Wage Laws:  Economic verses Ideology”  Mises Daily Thursday June 10, 2007  by D. W. Mackenzie

3)      Economics in One Lesson, Hazlitt, Henry, Harper and Brothers Publishers, New York, 1946, page 5.

4)      Ibid

5)      Data taken from Wall Street Journal editorial “The New Cannery Row” June 1, 2010 and Minimum Wage Cruelty:  Update by Williams, Walter; Jewish World Review May 26, 2010

**About the Author:  William J Michie, Jr has a BS and MS degree in Chemical Engineering from Drexel Univeristy and an MBA degree from Rutgers University.  He has had a 32.5 year career in Polyethylene Product Development with Union Carbide and Dow Chemical Corp. and is the holder of a number of patents.**

About The Author: William has a BS and MS degree in Chemical Engineering from Drexel University and an MBA degree from Rutgers University. He has had a 32.5 year career in Polyethylene Product Development with Union Carbide and Dow Chemical Corp. and is the holder of a number of patents.