Monday, January 02, 2006

When government throws people out of work

I was watching "Today" this morning when the local affiliate chimed in with regional news. The reporter stated, "Many New Yorkers will now be making more money." I had forgotten: as of yesterday, the minimum wage in New York state is now $6.75 an hour, a gigantic increase from $6. It's important that when we use the phrase "minimum wage," we remember that we refer to an increase forced by government, not a company's purely voluntary decision (like Henry Ford did) to raise employees' wages.

As Bastiat would say, what is seen is the higher minimum wage, mandated (a euphemism for coerced) by law. What is not seen is that workers at the bottom are made less employable. If knowing what you're talking about, let alone truth, were a requirement in news, the reporter should have said, "Some New Yorkers will be earning higher wages. Others, however, will be laid off or have their hours cut because many businesses will no longer be able to afford them." One misuse of words that I consciously avoid is "make" when speaking of earning income.

I used to talk with a broker who wondered why investors looked unfavorably at unit labor costs. He questioned why confidence in a company should decrease just because "someone's getting paid more." It's very simple: profitability! Companies lose when they pay more but aren't earning more revenue. However, when we're talking about increases in the minimum wage, we're not just talking about profitability, but often about simple solvency. Higher minimum wages primarily impact small businesses, which both Democrats and Republicans commonly extol as "the backbone of America" (a very populist thing to say). Faced with a huge increase in wages, a business will have to determine a balance between passing that cost onto its customers (which is often called "inflation" but really is not), cutting workers' hours, and laying off workers.

I still do not understand something about which I wrote last March: "liberals disparage big business (except when run by the state), yet their proposals like minimum wage hikes, mandated health insurance benefits, etc., most adversely affect the smaller businesses that liberals are supposed to champion."

Minimum wage increases will impact a few large businesses like Wal-Mart, those that depend on paying low wages to provide low-priced products. Wal-Mart is often thought of as so big that it can easily afford to pay higher wages, but it actually has lower profit margins than a lot of retail stores. If it raises its prices to compensate, it will principally affect the poor, who depend the most on Wal-Mart's "everyday low prices." Instead of raising prices, Wal-Mart might choose to lay off workers (and wouldn't they rather have some income instead of none at all?), which necessitates pushing the rest to be more productive. Wal-Mart may also give reduced benefits and pay raises to other workers who are making more. Such workers could leave for jobs where they will be paid better (or perhaps less, but for a less demanding job that is worth their time), meaning government has created an artificial shortage in one segment of labor.

Worse, Wal-Mart may not open new stores in the state, and it may close its existing ones. The former is a possibility that the New York Post editorial writers and I feared last August, with regard to Wal-Mart opening in the city, when the New York City Council passed legislation forcing companies (with a minimum number of workers) to provide basic health care. It was a lobbying effort not really by grocery workers unions, but by the smaller, always expensive grocery stores themselves: unable to compete, they abused the power of the state to protect their virtual monopolies. The liberal politicians did help workers, actually only some workers (because they protected a few workers while preventing Wal-Mart from creating jobs), but at the same time they harmed the poorest people by depriving them of Wal-Mart's low prices. In practice, liberals must choose between workers and "the poor," two groups they claim to champion; they cannot be for both simultaneously.

It never crosses the minds of liberal bleeding hearts -- the politicians and social advocates who claim to work for the benefit of "the poor" -- that raising the minimum wage must come at the expense of everyone else. It's not a net increase, but only an economic transfer, and a government-coerced one at that. What we should instead promote is economic growth for everyone, so that rising wages at the bottom do not mean reduced wages at the top. Wages may well rise unequally, that no one can certainly deny, but at least real economic growth is not a zero-sum game. Even if wealth is created at the top, it indeed spreads to everyone else. There's a very good reason that, as Don Luskin reminded us, the top earners' share of total income falls greatly during recessions: when "the rich" have less money, that's less they spend on goods and services everyone else provides, and it's less money they can lend.

Those who favor higher minimum wages invariably insist that, without the minimum wage, "the poor would not make enough to live." Someone once told me that businesses would pay people only a dollar an hour, that "rich people" would pay cleaning women "only 50 cents an hour" and demand that they be "invisible." Is that so? Even for two dollars an hour, I'd have someone come over every day to do my laundry and dishes. Demand for such services, therefore, would go up, enabling "the poor" to demand more in pay. (As it stands, for the $40 or so per hour that legal workers around here charge, my time is not so valuable that I'd pay such wages.)

And frankly, if 50 cents an hour is all people are worth, then that is all they are worth. Unless they start producing greater economic value, they had better be prepared to work longer hours. Life isn't easy, and having had to work hard, I have every right to say that someone's plainly stupid to think he or she deserves a "living wage" for a mere 40 hours every seven days. Who really thinks that "the rich" got to where they are by working such short work weeks? It's not unheard of that law school graduates' first jobs are grueling seven-day work weeks of doing pure research for senior attorneys. Nor is it unheard of that budding investment bankers sometimes go home only to shower and put on fresh clothes. These are some of the people who wind up at the top because of hard work most of us will never know, yet liberals try to socially engineer us to think that "the rich" make more money at our expense. Far from it: "the rich" earn higher pay because what they do is worth more. Few people can argue a top case involving Fortune 500 corporations, or advise on mergers. Few people, however, cannot bag groceries, stock shelves and mop floors.

Let me also say that Westerners, especially recent college grads who never before held a demanding job, are so spoiled in their quest to live well on 40-hour work weeks (unless you're French and insist on 35-hour weeks). Not many decades ago in the U.S., 70-hour weeks on farms was light work. It's long overdue that we destroyed this myth that people are "entitled" to a wage allowing them to work a relatively easy job and live ok. Instead of the immoral path of using government to force others to pay you more, improve yourself so that someone will be more than willing to pay you a higher wage. Some people accuse me of being unchristian because I don't believe it's government's role to help the poor. Why should my belief in limited government contradict my Christian beliefs? Christ did not command at the end of Matthew 25 to pay taxes so government can help the poor. As such, I give to private charities, usually the Salvation Army, for those who cannot (not will not) work enough to support themselves.

I have a close friend whose husband works for the New York MTA. Like most transit workers and their spouses, they think the MTA's 3%/4%/3% wage increase offers are too low, and that the workers "deserve" 8%. In fact, the "low" offers are more than what a lot of people get from year to year, and MTA workers already get excellent pay and benefits for what they do. Putting aside the economics lesson of how much people are really worth in pay, if we are to learn anything from the MTA strike, let it be the fallacy of raising the minimum wage "to make people better off." Such an overly simplistic and naïve act will ripple through the economy in at least one of the three undesirable ways. With a specialized service like New York City subways, higher wages for transit workers means fare increases, which impact the poor more than everyone else, and more tax dollars from Albany (which means higher taxes, which affect everyone even if just on the top tax brackets).

As our friend Capital Freedom pointed out, minimum wages force employers to lose money on employees who aren't worth the mandated pay. My focus for a long time has been that raising the minimum wage skews the labor market. It encourages an oversupply of labor at the very bottom, simultaneously discouraging the supply of labor that is worth the new minimum wage. Not only will the state of New York lose some labor that was worth $6.75 per hour, those who were already earning $6.75 per hour will face some higher prices as businesses try to compensate for higher labor costs.

When will the madness end? I haven't yet mentioned that the next minimum wage hike takes effect on January 1, 2007, to $7.15 an hour. How many more of the poor do politicians and social advocates want to burden with artificially higher prices? How many more people do politicians and social advocates want to make less employable, or purely unemployable? None, of course, but as a matter of history, let alone economics, the results of their minimum wage legislation are far from the intentions.

The economics of Costco, Sam's and Wal-Mart
Who doesn't like Wal-Mart's "everyday low prices"?
When government makes you unemployable
How much do you "deserve" in pay?
A different look at raising the minimum wage
Senate defeats efforts to raise the minimum wage

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Blogger Justin said...

I have to take issue with the idea that minumum wage laws most affect small companies. Because small companies are less likely to pay benefits like health insurance, they must offer higher wages to compete in the labor market. But larger companies can offer lower wages, closer to the minimum wage levels, when they offer those benefits.

Your larger point isn't missed.

Tuesday, January 03, 2006 10:44:00 AM  
Blogger Perry Eidelbus said...

It's usually smaller companies, though, that typically offer lower wages and few (if any) benefits. By the nature of their business, they need and can only afford low-skilled or no-skill labor, which tend to be first-time job holders.

Tuesday, January 03, 2006 12:01:00 PM  

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