An Update on How the Minimum Wage Hurts Workers

June 22, 2014

It has been a while since I last blogged. A lot has happened recently that is worth commenting on. But, this post will focus on the correctness of my previous postings that the minimum wage hurts workers.

According to Andy Puzder, the CEO of CKE Restaurants – parent company of Carl’s Jr. and Hardee’s, in locations across the country where the minimum wage has been increased, his company’s franchisees are closing shops after their leases expire. “When the minimum wage increases, there are two things you can do,” he said. “One is you can reduce the amount of labor that you use or you can increase your prices.” Unfortunately, minimum wage increases do reduce jobs; as in the case above sometimes all jobs are eliminated.

But, Puzder is also correct about the causation between minimum wage increases and price increases. Many businesses in SeaTac, Washington, where the local minimum wage has recently been increased to $15, have imposed an 8.25 percent “Living Wage Surcharge” on goods and services to ease the increased cost of labor on business.

However, the bulk of the negative consequences of the $15 minimum wage in SeaTac have fallen on local workers. Those making the higher wage have reported losing their 401ks, paid holidays and paid vacations, free food, free parking, and overtime hours. In many cases, these benefits plus the lower state minimum wage added more value to workers’ earnings than the new $15 wage.

In the final analysis, the minimum wage does not enrich the working class or stimulate the economy like its proponents claim. Quite the opposite is true. The money involved to pay for the increased labor costs is not free. It comes from consumers in the form of higher prices and it comes from workers in the form of lost benefits and lost jobs.


President is Pushing Another Failed Policy

February 28, 2014

A couple of weeks ago, I received an email update from President Obama which discussed his signing of the Executive Order raising the minimum wage to $10.10 an hour for federal contract workers.  Within his remarks the President stated his belief that, “It’s the right thing to do”, raising the minimum wage for federal contract workers.

Naturally the President used the news of the Executive Order as a segue to lobby Congress to raise the federal minimum wage from $7.25 to $10.10 an hour for all American workers.  He claims raising the minimum wage “would move millions of Americans out of poverty”.  In fact, Obama indicated that, “Raising the minimum wage would grow the economy for everyone”.  The latter remark is based on his undying Keynesian dogma that more spending is the key to growing the economy.

There’s only one big problem with the President’s position on raising the minimum wage.  It’s called the Law of Demand.  According to this law of economics, with all other factors being equal, when the price of a good or service increases, demand for that good or service decreases and vice versa.

In the case of minimum wage laws, the service in question is the labor offered by workers.  Since minimum wage laws make the price of labor artificially higher the demand for labor decreases per the law of demand.  Consequently, some workers will receive pink slips and others will not be hired.  Higher unemployment will result.

In fact, a Congressional Budget Office report last week confirmed just that.  It indicated that Obama’s proposal to raise the minimum wage from $7.25/hour to $10.25/hour would result in the loss of possibly 1 million jobs.

And there are other reports issued by economists who know the laws of their science, which have found that minimum wage measures cause higher unemployment.  It’s also important to understand that that higher unemployment will result in greater income inequality between rich and poor.

At the end of the day, the President’s belief that raising the minimum wage will grow the economy is ridiculous.  In the first place, the law of demand tells us that less people will be working.  In the second place, the president is assuming that the money businesses earn which does not go to higher wages for their employees, somehow gets sucked down a black hole.  Does he not understand that that money could be channeled into productive enterprises like plant expansions, training for employees, and research and development?  All are enterprises which ultimately lead to job creation and higher pay for workers.  Even my 8th grade economics students understand this.  They also understanding that raising the minimum wage is not the right thing to do.


It’s Time to Try Something New for a Change

January 16, 2014

Last week, on the 50th anniversary of Lyndon Johnson’s so-called War on Poverty, President Barack Obama unveiled his latest initiative to combat economic deprivation in America.  The President’s latest scheme involves public and private funding to create jobs, enhance public safety, improve schools, and provide better housing in 20 communities across the country.  You know, it is the same old story.  If only the federal government would spend enough money we could eradicate poverty in our lifetime.  Unfortunately, for Obama, his latest initiative to fight poverty will have the same end result as LBJ’s War on Poverty – utter failure.

You see, in the 50 years since LBJ signed into law the most sweeping social welfare programs in the history of the U.S., Uncle Sam has spent about $16 trillion on public assistance schemes.  Yet, Americans living in poverty has only gone from 19 percent of the population in 1964 to about 15 percent today.  Put another way, it cost our economy $4 trillion for every percentage point decrease in the rate of poverty.  Given our already enormous national debt and the future calamity it will bring, isn’t there a more cost effective way to help the poor escape poverty?  We cannot afford to spend more money and that is clearly not the answer anyway.

At the end of the day, the best way to fight poverty is with a job.  Thus, to help the poor all minimum wage laws should be repealed immediately.  The late, great, Murray Rothbard had it right when he labeled minimum wage laws “compulsory unemployment”.  Whenever government fixes prices either shortages or surpluses result.  Fixing wage rates above the market rate will only lessen demand for workers’ labor.  Thus, a surplus of workers’ labor (unemployment) will result.  This is Economics 101.

Low wages may not provide a decent standard of living, but for the 49 percent of African-American youth who are currently unemployed, the jobs they would have by virtue of repealing minimum wage laws would give them the opportunity to work hard, get work place experience, and build a resume.  All three could lead to higher paying jobs in the future.

But repeal of minimum wage laws alone isn’t enough.  Uncle Sam needs to repeal costly regulations on business which prevents the creation of new jobs.  In 2013, the federal government adopted $112 billion worth of new regulatory costs on job producers.  This amounted to 80,224 pages being added to the Federal Register.  Since Barack Obama became president in 2009 close to $500 billion in new regulations have been imposed.  And then there is the job killing scheme known as Obamacare.  At a time when the labor force participation rate is at the lowest level since 1978, should the federal government really be concerned about expensive energy efficiency standards for microwave ovens?

To be sure, more could be done to alleviate the scourge of poverty.  A gold backed dollar like existed in the late 1800s and which kept price inflation flat for more than 60 years should be reintroduced in America.  Abolition of the Federal Reserve System which is primarily responsible for the continuous boom and bust cycle in our economy and the destruction of the middle class should be enacted.

In the final analysis, for 50 years, Washington has thrown good money at the so-called War on Poverty.  The result has been failure to achieve the objective.  And this is why it’s time to try something new for a change.


D.C. Mayor to Sign Outrageous Minimum Wage Scheme into Law?

September 7, 2013

This could be the week when Washington, D.C. Mayor Vincent Gray signs into law a minimum wage measure passed by the D.C. city council two months ago.  The Large Retailer Accountability Act would require stores that are larger than 75,000 square feet and whose parent companies have yearly revenues of $1 billion.to pay its workers 50 percent more than the current local minimum wage of $8.25 per hour.  Proponents of the new law cite the need for Wal-Mart and other employers to pay a “living wage”.  Detractors of the measure, including the liberal Washington Post, correctly claim it will give the nation’s capital an anti-business reputation which will continue to hinder job growth in the District.

Naturally, the Post’s analysis is spot on as Wal-Mart has threatened to scrap plans to build up to six stores in the D.C. area.  Altogether, 1800 jobs would be lost including at two locations in impoverished neighborhoods.

Nevertheless, backers of the measure are stubbornly sticking to their dogma even as Wal-Mart warns it will pull the plug on 1800 jobs if the measure becomes law.

Last week, Councilman Vincent Orange, in a statement reflecting serious economic imbecility, stated, “We’re glad (Wal-Mart) finally recognized the value of the District of Columbia, but we also recognize the value of our residents, and the value of one hour of our residents’ time is greater than $8.25″.

Wow, what does that mean?  Is Orange claiming that he and other council members are smart enough to determine the worth of every single worker in the nation’s capital?  Wasn’t this same hubris found to be fallacious in the collapsed Soviet Union?

It is bad enough that there is any minimum wage in D.C. let alone an attempt to produce a double tiered system.  Minimum wage laws are, as the late great Murray Rothbard put it, “compulsory unemployment”.  Rothbard explained it well:  “The law says it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.”

But, besides Rothbard’s cogent argument against minimum wage laws, the two tier system developed in D.C.is un-American.  How can there be two different sets of rules for different players in the marketplace?  Would there not be outrage if the government provided bailouts to two car manufacturers while the third which managed its business responsibly was not rewarded with federal largess?  Perhaps that’s not the best example, but again, even the leftist Washington Post understands that the law will create an “uneven playing field” for Wal-Mart and other big box retailers.

At the end of the day, one must question the motives of the Washington D.C. city council which passed the measure.  This particular city council has had three of its members convicted, one plead guilty, and another under investigation for bribery and corruption.  The law targets large, non-unionized retailers.  Was its passage a payback for union donations?  Unfortunately, for workers in D.C., whether it was or not, if the mayor signs it into law they will be out 1800 jobs.


Focus on Minimum Wage is Misplaced

May 17, 2013

In spite of the abysmal unemployment problem in the United States, President Obama was in Texas last week touting his plan to raise the minimum wage to $9 an hour.  Recently, New York, Chicago, St. Louis, and Detroit have seen fast food workers walk off the job and strike demanding higher wages.  Specifically, in Detroit, the Michigan Workers Organizing Committee, a coalition of labor, religious and community organizers is calling for a national minimum wage of $15 an hour.

The common denominator for everyone who wants to raise the minimum wage is the claim that the current government mandated floor price for hourly workers is too low for them to make a decent living.  Then there are the recipients of low wages, who claim their value, after years of faithful service to an employer, is much higher than the wages they receive.  For them, raising the minimum wage is the only way they can potentially get what should be coming to them – a higher rate of pay.  At the end of the day, proponents of raising the minimum wage assert that it is simply a matter of fairness to give those at the bottom rungs of the socio-economic ladder a little more.

Well, there are a lot of problems with the above reasoning.  In the first place, only two percent of wage earners in America work for minimum wage.  While workers under 25 years of age account for just 20 percent of hourly paid workers, they make up close to 50 percent of those earning the federal minimum wage or less.  In other words, very few workers are affected by the minimum wage and those that are tend to be young, first time wage earners.  You know, the teenager working at McDonald’s after school.  Naturally, older folks with familial responsibilities should find it hard to live making the current minimum wage.  The system is not really set up for them.

Then there is the economic problem caused by the minimum wage, namely unemployment.  Now, I know that there have been studies on both sides of the issue.  But, it is an economic fallacy to believe that the minimum wage does not cause unemployment.  Basic supply and demand tells us that as the price for a good or service increases, demand decreases.  Conversely, as price falls, demand increases.  By its very definition, the minimum wage is a price fix for labor above the market rate.  Thus, as the minimum wage level is greater than the equilibrium wage or wage level where demand equals supply, fewer workers will be demanded and a consequent surplus of workers will result.  Put another way, unemployment caused by the minimum wage is the difference between the amount of workers demanded and the amount supplied at the minimum wage level.  To decrease unemployment (surplus of workers) wages have to drop, just like the price of a good, to reach the clearing equilibrium price.  Naturally, this is impossible under federal and state laws, so unemployment persists until the minimum wage is overtaken by the market wage rate.

Instead of raising the minimum wage to help the working poor make ends meet, the focus should be on the cause of price inflation – the Federal Reserve Bank (the Fed).  Since 1971, when President Nixon ended the convertibility of the dollar to gold that foreign creditors enjoyed, the Fed has monetized over $16 trillion in U.S. government debt and created trillions more dollars out of thin air helping the American banking cartel increase its profits.  The result has been an 82 percent loss in the value of the dollar and consequent general price inflation.  For instance, in 1971, a basket of groceries that cost $30 would cost $173 today.  It’s no wonder minimum wage workers are hard pressed to make ends meet.

In the final analysis, only a return to sound money will ultimately help those currently working for minimum wage.  It wasn’t perfect, but a return to the pre-1971 gold exchange standard would eliminate the need to constantly raise the minimum wage, cure our chronic youth unemployment problem, and be a “matter of fairness” for all wage earners.

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


Anti-Free Market Economics based on Emotion not Reality

April 6, 2013

The biggest problem for free market advocates has always been that the policies we espouse do not play well with the peoples’ emotions.  After all, what sounds better to you?  “Recessions are economic downtowns made necessary by the mal-investment of the preceding phony Fed induced boom” or “We are going to put people back to work by spending money on public works projects building badly needed infrastructure”.

Now, if you or someone you love is unemployed, the last thing you want to hear is that the government is not going to do anything to get the economy rolling again.  But, as all proponents of the free market know, that is precisely what is required to liquidate the bad investments caused by government policy in the preceding boom and get our economy moving again.

So it is with President Obama’s proposal to raise the minimum wage from its current $7.25 level to $9.00 an hour.  It is all emotion over reality.  For his part, the President touts his plan as helping the working class achieve a livable wage.  And who isn’t for that?

But the reality is that the minimum wage will actually cause more unemployment among the very people Obama claims he wants to help.  Studies have proven that, but really all one needs to know is how supply and demand works – as the price of a good or service rises the demand for that good or service diminishes.  Thus, by raising the price of the introductory wage an employer can offer, demand for wage earners at that new higher level will be less than at the old lower level.  Employers will hire fewer employees and require existing employees to do more.

But, I suppose when raising the minimum wage causes more unemployment, the anti-free market types will be there to provide unemployment benefits to the jobless.  They will use emotion to tell us that needed medications will not be had, children will starve, and families will be in the streets without it.  Anyone who stands in the way of extending benefits hates the poor, the workers, minorities, women, and children.  Forget that it was the policies of the anti-free market types which destroyed the economy in the first place and produced high unemployment.

At the end of the day, economic policy should have nothing to do with emotional pleas for government to do something.  When government does something it ends in harming those it was meant to help.  Has government involvement in the health care industry provided a system that is accessible to all?  Has the Community Reinvestment Act, Freddie Mac, and Fannie Mae served homeowners well?  Do we have first rate schools because of the Department of Education, energy independence because of the Department of Energy, or an abundance of jobs in America despite heavy regulation to protect workers from Washington?

Washington’s record in managing the economy is abysmal.  Economics is a logic based science.  The sooner Americans realize that the sooner we can rid ourselves of anti-free market schemes and heal our economy.

 

Kenn Jacobine teaches internationally and maintains a summer residence in North Carolina


Romney is Focusing on the Wrong Mechanism

February 14, 2012

Coming off derogatory remarks he recently made about the underclass in America, Republican presidential hopeful Mitt Romney apparently felt the need to throw them a bone. Last week, he reaffirmed his support for linking regular increases in the minimum wage to the rate of inflation. Given that Romney has held this position since he ran for governor of Massachusetts in 2002, one could assume that he really believes the proposal would go a long way to helping the working poor. But, what he is really doing is focusing on the wrong mechanism to help them.

On the surface, Romney’s proposal seems reasonable. As prices increase, so should wages. After all, aren’t Social Security benefits indexed for price inflation?

However, the first realization that must be acknowledged is that government economic policy causes the price increases that allegedly make the minimum wage necessary for some to live a minimal existence. In other words, if the federal government would simply live within its means and cease using the Federal Reserve to monetize huge amounts of debt and maintain artificially low interest rates there would be little or no need for a minimum wage.

As the late, Austrian economist, Murray Rothbard pointed out in his book, The Mystery of Banking, from the mid-eighteenth century until 1940 prices in the United States actually fell on average from year to year with the exception being during war years. Since 1940, the Federal Reserve which became responsible for maintaining price stability and the value of the dollar through monetary policy oversaw a decline in the dollar’s value by more than 93 percent. That calculates to a 1506% annual rate of inflation change! It’s no wonder we have become a society with a low savings rate and two partners working to make ends meet.

What was the difference between these two economic epochs in our nation’s history? The first had a Gold Standard and the second was based on a fiat dollar standard.

The bottom line is that minimum wage laws are a reaction by politicians to their own historical bungling of the economy. If Mitt Romney and his ilk really wanted to help the working poor in America they would endorse a sound money policy instead. In particular, a gold backed currency that would alleviate the ability of politicians and central bankers to devalue the dollar and cause price inflation by printing money and running deficits. In short, a return to the Gold Standard would stabilize and eliminate the need for a minimum wage.