An Open letter to Thomas Perez, U.S.
Secretary of Labor
Dear Secretary Perez:
Raising the minimum wage is a formula for
causing unemployment among the least-skilled members of society. The higher
wages are, the higher costs of production are. The higher costs of production
are, the higher prices are. The higher prices are, the smaller are the
quantities of goods and services demanded and the number of workers employed in
producing them. These are all propositions of elementary economics that you and
the President should well know.
It is true that the wages of the workers
who keep their jobs will be higher. They will enjoy the benefit of a
government-created monopoly that excludes from the market the competition of those unemployed workers
who are willing and able to work for less than what the monopolists receive.
The payment of the monopolists’ higher
wages will come at the expense of reduced expenditures for labor
and capital goods elsewhere in the economic system, which must result in more
unemployment.
Those who are unemployed elsewhere and who
are relatively more skilled will displace workers of lesser skill, with the
ultimate result of still more unemployment among the least-skilled members of
society.
The unemployment directly and indirectly
caused by raising the minimum wage will require additional government welfare
spending and thus higher taxes and/or greater budget deficits to finance it.
Your and the President’s policy is
fundamentally anti-labor and anti-poor people. While it enriches those poor
people who are given the status of government-protected monopolists, it
impoverishes the rest of the economic system to a greater degree. It does this
through the combination both of taking away an amount of wealth equal to the
monopolists’ gains, and of causing overall production to be less by an amount
corresponding to the additional unemployment it creates. The rise in prices and
taxes that results from raising the minimum wage both diminishes the gains of
the monopolists and serves to create new and additional poor people, while
worsening the poverty of those who become unemployed.
Furthermore, the higher the minimum wage is
raised, the worse are the effects on poor people. This is because, on the one
hand, the resulting overall unemployment is greater, while, on the other hand,
the protection a lower wage provides against competition from higher-paid
workers is more and more eroded. At today’s minimum wage of $7.25 per hour,
workers earning that wage are secure against the competition of workers able to
earn $8, $9, or $10 per hour. If the minimum wage is increased, as you and the
President wish, to $10.10 per hour, and the jobs that presently pay $7.25 had
to pay $10.10, then workers who previously would not have considered those jobs
because of their ability to earn $8, $9, or $10 per hour will now consider
them; many of them will have to consider them, because they will be unemployed.
The effect is to expose the workers whose skills do not exceed a level
corresponding to $7.25 per hour to the competition of better educated,
more-skilled workers presently able to earn wage rates ranging from just above
$7.25 to just below $10.10 per hour. The further effect could be that there
will simply no longer be room in the economic system for the employment of
minimally educated, low-skilled people.
Of course, the minimum-wage has been
increased repeatedly over the years since it was first introduced, and there
has continued to be at least some significant room for the employment of such
workers. What has made this possible is the long periods in which the minimum
wage was not increased. Continuous inflation of the money supply and the
rise in the volume of spending and thus in wage rates and prices throughout the
economic system progressively reduce the extent to which the minimum wage
exceeds the wage that would prevail in its absence. The minimum wages of the
1930s and 1940s — 25¢an hour and 75¢ an hour — long ago became nullities. To
reduce and ultimately eliminate the harm done by today’s minimum wage, it needs
to be left unchanged.
The standard of living is not raised by
arbitrary laws and decrees imposing higher wage rates, but by the rise in the
productivity of labor, which increases the supply of goods relative to the
supply of labor and thus reduces prices relative to wage rates, and thereby
allows prices to rise by less than wages when the quantity of money and volume
of spending in the economic system increase.
If raising the standard of living of the
average worker is your and the President’s goal, you should abandon your
efforts to raise the minimum wage. Instead, you should strive to eliminate all
government policies that restrain the rise in the productivity of labor and
thus in the buying power of wages.
If your goal is to raise the wages
specifically of the lowest-paid workers, you should strive to eliminate
everything that limits employment in the better-paid occupations, most notably
the forcible imposition of union pay scales, which operate as minimum wages for
skilled and semi-skilled workers. In causing unemployment higher up the
economic ladder, union scales serve to artificially increase the number of
workers who must compete lower down on the economic ladder, including at the
very bottom, where wages are lowest. To the extent that occupations higher up
could absorb more labor, competitive pressure at the bottom would be reduced
and wages there could rise as a result.
Abolishing or at least greatly liberalizing
licensing legislation would work in the same way. To the extent that larger
numbers of low-skilled workers could work in such lines as driving cabs, giving
haircuts, or selling hot dogs from push carts, the effect would also be a
reduction in competitive pressure at the bottom of the economic ladder and thus
higher wages there.
The principle here is that we need to look
to greater economic freedom, not greater government intervention, as the path
to economic improvement for everyone, especially the poor.
Sincerely yours,
George Reisman, Ph.D.
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