Tag Archives: Minimum Wage

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New study: Obama’s proposed minimum wage hike could destroy 1 million jobs

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Labor Force Participation down to 62.8%
Labor Force Participation down to 62.8%

From the Daily Caller. (H/T Conway)

Excerpt:

The Obama administration’s proposal to raise the minimum wage to $10.10 an hour could result in as many 1,084,000 jobs eliminated from the work force, according to a new study conducted by the Employment Policies Institute (EPI)

“No amount of denial by the president and his political allies — and no number of ‘studies’ published by biased researchers — can change the fact that minimum wage hikes eliminate jobs for low-skill and entry-level employees. Non-partisan economists have agreed on this consensus for decades, and the laws of economics haven’t changed,” Michael Saltsman, research director at EPI, said in a statement.

He offered an alternative to the president’s plan: “Instead of raising small businesses’ labor costs and creating more barriers to entry-level employment, the president and the Senate should focus on policies that help reduce poverty and create jobs.”

The  study was released in the wake of an expected vote on a Senate bill that aims to raise the federal minimum wage from the current $7.25 an hour to $10.10 an hour — a nearly 40 percent increase.

Many Democrats argue that increasing the federal minimum will reduce poverty without having an adverse effect on unemployment.

EPI’s report, which used analysis from economists at Miami and Trinity University, reached a different conclusion.

Researchers used recently updated Census Bureau data from 2012 and 2013 to calculate how each individual state would be impacted by the proposed wage hikes. As a lump sum, Americans would see a loss of at least 360,000 jobs, and perhaps even over one million if hourly wages are increased to $10.10.

The number of job losses would be the most dramatic in large states, such as California and Texas. Economists found that California could lose as many as 100,016 jobs and Texas could see up to 128,617 jobs disappear from its economy.

This article from Investors Business Daily, written by the famous economist Thomas Sowell has more on the effects of raising the minimum wage.

Excerpt:

Switzerland is one of the few modern nations without a minimum-wage law. In 2003, the Economist magazine reported: “Switzerland’s unemployment neared a five-year high of 3.9% in February.”

In February of this year, Switzerland’s unemployment rate was 3.1%. A recent issue of the Economist showed Switzerland’s unemployment rate as 2.1%.

Most Americans today have never seen unemployment rates that low. However, there was a time when there was no federal minimum-wage law in the United States.

The last time was during the Coolidge administration, when the annual unemployment rate went as low as 1.8%. When Hong Kong was a British colony, it had no minimum-wage law. In 1991 its unemployment rate was under 2%.

[…]Most people in the lower income brackets are not an enduring class. Most working people in the bottom 20% in income at a given time do not stay there over time. More of them end up in the top 20% than remain behind in the bottom 20%.

There is nothing mysterious about the fact that most people start off in entry-level jobs that pay much less than they will earn after they get some work experience.

But when minimum-wage levels are set without regard to their initial productivity, young people are disproportionately unemployed — priced out of jobs.

In European welfare states where minimum wages, and mandated job benefits to be paid for by employers, are more generous than in the United States, unemployment rates for younger workers are often 20% or higher, even when there is no recession.

Unemployed young people lose not only the pay they could have earned but, at least equally important, the work experience that would enable them to earn higher rates of pay later on.

Minorities, like young people, can also be priced out of jobs. In the United States, the last year in which the black unemployment rate was lower than the white unemployment rate — 1930 — was also the last year when there was no federal minimum-wage law.

Inflation in the 1940s raised the pay of even unskilled workers above the minimum wage set in 1938. Economically, it was the same as if there were no minimum-wage law by the late 1940s.

In 1948 the unemployment rate of black 16-year-old and 17-year-old males was 9.4%. This was a fraction of what it would become in even the most prosperous years from 1958 on, as the minimum wage was raised repeatedly to keep up with inflation.

A survey of American economists found that 90% of them regarded minimum-wage laws as increasing the rate of unemployment among low-skilled workers.

Harvard University economist Greg Mankiw puts the level of opposition to minimum wage hikes at 79% among professional economists across the ideological spectrum.

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Jay Richards: eight common myths about wealth, poverty and free enterprise

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Have you read Jay Richards’ book “Money, Greed and God?” Because if you haven’t, he’s written a series of articles that summarize the main points of the book.

The index post is here.

Here are the posts in the series:

  • Part 1: The Eight Most Common Myths about Wealth, Poverty, and Free Enterprise
  • Part 2: Can’t We Build A Just Society?
  • Part 3: The Piety Myth
  • Part 4: The Myth of the Zero Sum Game
  • Part 5: Is Wealth Created or Transferred?
  • Part 6: Is Free Enterprise Based on Greed?
  • Part 7: Hasn’t Christianity Always Opposed Free Enterprise?
  • Part 8: Does Free Enterprise Lead to An Ugly Consumerist Culture?
  • Part 9: Will We Use Up All Our Resources?
  • Part 10: Are Markets An Example of Providence?

Parts 4 and 5 are my favorites. It’s so hard to choose one to excerpt, but I must. I will choose… Part 4.

Here’s the problem:

Myth #3: The Zero Sum Game Myth – believing that trade requires a winner and a loser. 

One reason people believe this myth is because they misunderstand how economic value is determined. Economic thinkers with views as diverse as Adam Smith and Karl Marx believed economic value was determined by the labor theory of value. This theory stipulates that the cost to produce an object determines its economic value.

According to this theory, if you build a house that costs you $500,000 to build, that house is worth $500,000. But what if no one can or wants to buy the house? Then what is it worth?

Medieval church scholars put forth a very different theory, one derived from human nature: economic value is in the eye of the beholder. The economic value of an object is determined by how much someone is willing to give up to get that object. This is the subjective theory of value.

And here’s an example of how to avoid the problem:

How you determine economic value affects whether you view free enterprise as a zero-sum game, or a win-win game in which both participants benefit.

Let’s return to the example of the $500,000 house. As the developer of the house, you hire workers to build the house. You then sell it for more than $500,000. According to the labor theory of value, you have taken more than the good is actually worth. You’ve exploited the buyer and your workers by taking this surplus value. You win, they lose.

Yet this situation looks different according to the subjective theory of value. Here, everybody wins. You market and sell the house for more than it cost to produce, but not more than customers will freely pay. The buyer is not forced to pay a cost he doesn’t agree to. You are rewarded for your entrepreneurial effort. Your workers benefit, because you paid them the wages they agreed to when you hired them.

This illustration brings up a couple important points about free enterprise that are often overlooked:

1. Free exchange is a win-win game.

In win-win games, some players may end up better off than others, but everyone ends up better off than they were at the beginning. As the developer, you might make more than your workers. Yet the workers determined they would be better off by freely exchanging their labor for wages, than if they didn’t have the job at all.

A free market doesn’t guarantee that everyone wins in every competition. Rather, it allows many more win-win encounters than any other alternative.

2. The game is win-win because of rules set-up beforehand. 

A free market is not a free-for-all in which everybody can do what they want. Any exchange must be free on both sides. Rule of law, contracts, and property rights are needed to ensure exchanges are conducted rightly. As the developer of the house, you’d be held accountable if you broke your contract and failed to pay workers what you promised.

An exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game.

On this view, what you really need to fear as a consumer is government intervention that restricts your choices in the marketplace.

Free trade in the real world

This is not a theoretical problem, either. Millions of people in the Ukraine are protesting against Vladimir Putin and his restrictive Russian policies in order to get more economic freedom by signing a free trade deal with the European Union.

Rick Pearcey posted about it on the Pearcey Report:

France24.com reports:

Hundreds of thousands of protesters swarmed Ukraine’s capital Kiev on Sunday, where the country’s opposition leaders urged them to continue heaping pressure on President Viktor Yanukovich to sack his government and abandon plans for closer ties with Russia.

Many of the demonstrators who gathered at the city’s central Independence Square are furious with the government over its decision to back out of a historic agreement with the European Union in favour of a possible trade deal with Russia, Ukraine’s Soviet-era ruler.

The protest . . . is just the latest sign of mounting tensions in Ukraine over the past two weeks, raising fears over the country’s political and economic stability.

That’s a real crisis: freedom-loving people fighting for their right to be prosperous by adopting the economic policies that produce wealth.

If you care about poverty, it’s often tempting to think that it can only be solved one way – by transferring wealth from the rich to the poor. But that is a very mistaken view, as any economist will tell you. The right way to create prosperity is by creating laws and policies that unleash individual creativity. Letting individuals create innovative products and services, letting them keep what they earn, making sure that the law doesn’t punish entrepreneurs – that incentivizes wealth creation. Fixing poverty does not mean transferring wealth, it means giving people more freedom to create wealth on their own. Free trade between nations is an important way that we encourage people to create better products and services that what they have available in their own countries.

Economists agree on the benefits of free trade

Who could possibly disagree with free trade? Well, many people on the left do. They favor imposing restrictions on free trade. For example, people on the left favor making those who import goods pay tariffs, which makes it harder to trade with other nations. People on the left want to pass rent control laws to block landlords and tenants from trading more freely. People on the left want to pass minimum wage laws that block employers and workers from trading wages for labor more freely. But economists generally don’t agree with any of restrictions on free trade. In fact, even across the ideological spectrum, the majority of economists view free trade as a wealth creating policy, and restrictions on free trade as a wealth destroying policy.

Harvard economist Greg Mankiw explains what most professional economists agree on.

Excerpt:

Here is the list, together with the percentage of economists who agree:

  1. A ceiling on rents reduces the quantity and quality of housing available. (93%)
  2. Tariffs and import quotas usually reduce general economic welfare. (93%)
  3. Flexible and floating exchange rates offer an effective international monetary arrangement. (90%)
  4. Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)
  5. The United States should not restrict employers from outsourcing work to foreign countries. (90%)
  6. The United States should eliminate agricultural subsidies. (85%)
  7. Local and state governments should eliminate subsidies to professional sports franchises. (85%)
  8. If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)
  9. The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85%)
  10. Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84%)
  11. A large federal budget deficit has an adverse effect on the economy. (83%)
  12. A minimum wage increases unemployment among young and unskilled workers. (79%)
  13. The government should restructure the welfare system along the lines of a “negative income tax.” (79%)
  14. Effluent taxes and marketable pollution permits represent a better approach to pollution control than imposition of pollution ceilings. (78%)

Now when you are talking to a Democrat, you are talking to someone who disagrees with most or all of those common sense economic policies. For example, Obama’s backers in the labor movement inevitably endorse higher import tariffs, which discourage free trade between countries. No economist supports these tariffs on imports, because history has shown (e.g. – Smoot-Hawley Act) that tariffs destroy economic growth and reduce wealth creation. And that’s what I mean when I talk about economic illiteracy – I mean ignoring what we know from economics and our own experience with bad policies when we make policy.

Democrat economic policies don’t work because they are making policies that are based on economic myths. We know that these myths are myths because of economics is a mathematical science, and because we have tried good and bad policies in different times and places. We have calculations and we have experience to know what works and what doesn’t work. If you want to help the poor, you have to respect what economists know about how wealth is created. The solution is not to “spread the wealth around”, it’s to encourage people to create more wealth by inventing things that people freely choose to buy.

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Why is the unemployment rate for young people so high?

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A few of the policies that are causing the problem are explained in this article from the American Enterprise Institute. I have highlighted the policies that discourage employers in the snippet I excerpted below.

Excerpt:

If Washington is serious about helping this vulnerable population, it should focus on increasing workers’ take home pay and lowering the business employment costs. Conventional wisdom preaches increasing minimum wages. But a far more effective policy would be to simply exempt younger workers and their employers from paying taxes related to their employment.

People in the workforce typically get their start when they are young – beginning with some entry level job where they learn basic job skills, develop effective work habits, and earn a modest wage. This important first step gives them a chance at earning wages and achieving a level of success that facilitates advance up the economic ladder. Work habits and skills are generally learned early in life or unfortunately for too many, not learned at all.

The long term damage caused by this lack of employment is very large. Income mobility has declined. The sad fact is the probability of people at the bottom moving up the income ladder is lower than it was 20 and 30 years ago. Many studies have demonstrated that three factors determine most of the difference between those who start in poverty and stay there and those who don’t – finishing high school; avoiding becoming a teenage parent, and getting a full-time job. Those who do all three have only a 2 percent chance of living in poverty and a 75 percent chance of joining the middle class.

Many economists and social scientists have suggested both demand and supply reasons why youth unemployment is so high. On the demand side, the national safety net – Food Stamps, Earned Income Tax, welfare and subsidy programs of all kinds – substantially reduce the relative benefit of working. In other words, the wage premium for working versus taking advantage of benefit programs on an after-tax basis is simply too small to encourage many people to work.

If a young person enters the work force at the minimum wage, he grosses $7.25 per hour. From this, in a place like Los Angeles, he pays federal and state income taxes and Medicare and Social Security payroll taxes which total $1.11. So, out of the $7.25 earned, he keeps just over $6. If he is single and without children, he won’t qualify for the Earned Income Tax Credit (EITC) or food stamps.

On the supply side, the cost of employing young people is high relative to their economic contribution to potential employers. An entry-level employee costs his employer much more than $7.25. In addition to his wages, the employer also pays Social Security and Medicare taxes, plus unemployment insurance, that add on an average of 92 cents. So today, the new employee costs the business $8.13 per hour, of which the young employee keeps only three-quarters.

This cost will increase further when the Affordable Care Act kicks in. Beginning in 2015, if the employer has more than 50 employees, he will have to provide health insurance for full-time workers or pay a $2,000 fine – which comes to $.96 per hour. That will make an abysmal employment situation even worse.

Overall, public policy ought to be aimed at encouraging businesses to create entry level jobs. Perversely, attempts to increase the minimum wage and institute so-called living wages would do the exact opposite. If government wanted to help create a permanent economic underclass, it would implement exactly the policies that are in place. All of us who want people to enjoy earned success ought to be outraged at these government policies.

This is important, because very often the policies proposed by people on the left are not designed to solve the problem. Thomas Sowell argues that the real purpose of leftist policies is for leftist leaders to feel self-important by getting applause from those who are economically ignorant. They push policies that sound good but that don’t actually work.

The good news is that young people are waking up. According to a Harvard University survey, 57% of young adults now disapprove of Obamacare. Even they are starting to think about what is happening to them. Maybe they can avoid the slavery that awaits them under the Democrat’s massive program of intergenerational theft, but I’m not optimistic. They have really short attention spans, and you don’t learn the fundamentals of economics on Instagram and Pinterest.