Politicians and the media have done a great job of convincing ordinary Americans that they know what they are doing when it comes to managing the economy. Even though they are the ones who got us into our current mess, the electorate continues to send the same pols back to Washington and they continue to watch financial news networks that act more like cheerleaders for government policy than objective analysts.
Take President Obama’s proposal to increase the current minimum wage from $7.25 an hour to $9.00 an hour for instance. When polled, huge majorities of Americans support the proposal.
But, it is an economic fallacy to believe that even having a minimum wage will not cause unemployment. Basic supply and demand tells us that as the price for a good or service increases, demand is diminished. Conversely, as price falls, demand increases. That is why when I go to see my hometown minor league baseball team, I and many other patrons wait until the ninth inning of the game to buy pizza because by then it has been marked down to increase demand preventing leftover unsalable pies. Depending on the attendance remaining at the end of the game, I often have to rush down to the concession stand to get my pizza before the lower price produces the desired effect – no more pizzas.
Now, I understand that pizza is a good to be consumed at a baseball game and labor is a service provided by workers to employers. But, in terms of the pricing mechanism, labor is no different than pizza. A government mandated price floor (minimum wage) does not give the worker the opportunity to negotiate a wage with the employer below that price floor. In many cases workers are willing to accept lower wages but are legally not able to. Thus, because labor is priced above its market value there will be less demand for it. In other words, less workers will be hired until the wage rate floor is allowed to adjust down. Of course, unlike the pizza, that will never happen because that would be political suicide for politicians.
With regards to Obama’s proposal to increase the minimum wage from $7.25 an hour to $9.00 an hour, most jobs that currently pay between those wage rates will be eliminated in the future. Why would an employer pay $9.00 an hour for an employee who is worth, either through skill or job requirements, only $7.50 an hour? In most cases they wouldn’t. Thus jobs will be eliminated and current employees will be expected to do more. Any way you slice it, minimum wage laws limit employment and therefore cause unemployment.
In the final analysis, it is incumbent on citizens to understand basic economic principles and how government’s violation of those principles will affect the economy. Simply believing that those who gave us the current economic mess are also the ones to get us out of it is asinine. Believing minimum wage laws don’t increase unemployment because the President proposes increasing the current minimum wage is irresponsible.
Article first published as Economic Fallacy: Minimum Wage Doesnâ€™t Cause Unemployment on Blogcritics.
Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina