Freeman

ARTICLE

The Minimum Wage Law

Minimum Wage Laws Disadvantage Young and Inexperienced Workers

JUNE 01, 1995 by RAPHAEL G. KAZMANN

Professor Kazmann lives in Baton Rouge, Louisiana.

The minimum wage law is based on the assumption that some minimum hourly rate of pay should be legislated so that people will have a minimum income to support themselves and their families. The law makes it illegal for an employer to pay an hourly rate lower than the minimum wage specified by the Congress. In line with this reasoning, the higher the minimum wage, the more prosperous the workers will be. If this is so, why not set the minimum hourly wage at $20 so that everyone will be better off? The proponents of the minimum wage have avoided taking this step.

A basic law of economics states that the higher the price of something, be it a commodity or labor, the smaller the quantity demanded. In simple English: the higher the price, the smaller the sales. When a minimum wage is established at a level above the one that would be determined by market forces, employment opportunities are usually reduced for the least productive workers because their services are priced too high for the market. In fact as the minimum wage is raised, even some workers who had been employed are discharged simply because their services do not produce value in excess of their wages (plus Social Security taxes, vacations, medical insurance, and so on). We can deduce that the principal impact of minimum wage legislation is to reduce the opportunities for useful employment by the potentially least productive individuals. Thus the most economically vulnerable portion of the population is being prevented by the government from becoming self-sustaining. This outcome may not have been anticipated by the well-intentioned legislators who passed the minimum wage law as part of the Fair Labor Standards Act of 1938.

The enforcement of minimum wage legislation accomplishes two things: (1) it makes low-skilled labor more expensive than it would otherwise be, thus fostering labor-saving devices that higher priced labor creates (and raising the prices in the affected industries), and (2) it reduces the numbers of young and low-skilled workers entering the labor market where training and apprenticeship would later permit the trainee to obtain a better, higher paying job.

Martin Feldstein described matters clearly: “The minimum wage law has an unambiguously harmful effect on some young workers. Even if an individual were willing to ‘buy’ on-the-job training by taking a very low wage for six months or a year, the minimum wage would not permit him to do so…. For the disadvantaged, the minimum wage law may have the ironic effect of lowering lifetime incomes by a very large amount.” (The Public Interest, Fall 1973)

Civil Rights legislation in its inception was most benign by removing legal barriers to the employment of blacks and other minorities. Inexplicably, however, it ignored the impact of minimum wage laws on the employment of young people just entering the labor force, particularly on black teenagers. Yet the empirical evidence illustrates the trends, even though any statistical evidence that pertains to the entire country is likely to contain inaccuracies of detail. Since 1938, when the minimum was set at $0.25 per hour, the hourly minimum has risen until, in 1981, it was fixed at $3.35; more recently it was increased, in stages, to $4.25 per hour. In 1988 it was 13.4 times what it was originally. Economists have computed that because of inflation the minimum hourly rate, expressed in 1938 dollars, has been between $0.56 and $0.59 since 1974. The coverage of industries subject to minimum wage laws has been extended: between 1967 and 1974, approximately 75 percent of private, non-agricultural workers were covered; since 1974, approximately 83 percent have been subject to its mandate.


Comparison of Youth and Unemployment
Rates by Race (males)

      Min.             White       Black
Year       Wage       General       16-17       16-17

1948             3.8       10.2       9.4
1949             5.9       13.4       15.8
1950       .75       5.3       13.4       12.1
1951             3.3       9.5       8.7
1952             3.0       10.9       8.0
1953             2.9       8.9       8.3
1954             5.5       13.4       14.4
1955       1.00       4.4       11.3       13.4
1956             4.1       10.5       15.0
1957             4.3       11.5       18.4
1958             6.8       15.7       26.9
1959             5.5       14.0       25.2
1960             5.5       14.0       24.0
1961       1.15       6.7       15.7       26.8
1962             5.7       13.7       22.0
1963       1.25       5.7       15.9       27.3
1964             5.2       16.1       24.3
1965             4.5       12.9       23.3
1966             3.8       10.5       21.3
1967             3.8       10.7       23.9
1968             3.6       10.1       22.1
1969       1.30       3.5       10.0       21.4
1970             4.9       13.7       25.0
1971             5.6       15.1       28.8
1972             5.6       14.2       31.0
1973             4.9       12.3       27.0
1974       1.60       5.6       13.5       33.7
1975       1.80       8.5       18.3       38.1
1976       2.00       7.7       17.3       37.5
1977       2.20       7.0       15.0       39.2
1978       2.65       6.0       13.5       36.7
1979       2.90       6.8       13.9       34.2
1980       3.10       7.1       16.2       37.5
1981       3.35       7.7       17.9       40.7
1982             10.1       21.7       48.9
1983             9.9       20.2       48.8
1984             7.4       16.8       42.7
1985             7.2       16.5       41.0
1986             7.0       16.3       39.3
1987             6.2       15.5       34.4
1988             5.5       13.9       32.7
1989             5.3       13.7       31.9
1990       3.80       5.4       16.4       35.2
1991       4.25       6.3       18.1       49.8

Note: The minimum wage rates have been applied to increasingly larger segments of the working population, so the unemployment rates understate the effect of the minimum wage in decreasing the opportunities for first entrants to the labor force. Moreover, as the effect of inflation is to lower the real cost of the minimum wage, the unemployment rates of teenagers dropped between 1983 and 1989 by one third. Note the abrupt rise in unemployment as the minimum wage rose in 1990 and 1991.


The Impact on the Young

The effect of the minimum wage and the increase in the percentage of industry that it covers have had a significant, deleterious impact on the young worker. Between 1948 and 1955 the unemployment rate for young males was about 6 or 7 percentage points higher than the general rate of unemployment and there was no significant difference between the unemployment rates of blacks and whites. After 1955, when the minimum wage was raised sharply, not only did the difference between the general unemployment rate and that of the young white male rise to 9 or 10 percentage points, but the unemployment rate of black teenagers rose even more sharply reaching a differential of between 15 and 20 percentage points as compared to the general rate of unemployment.

After the increase of 1968, the difference between white teenagers and the general rate went up to from 10 to 12 percentage points; black teenage unemployment rose still more. Since 1973 the unemployment rate for black teenagers has been from 25 to 35 percentage points above the general rate.

Walter Williams (Policy Review, Fall 1977), said: “The minimum wage gives firms effective economic incentive to seek to hire only the most productive employees, which means that firms are less willing to hire and/or train the least productive employee which includes teenagers and particularly minority teenagers. By holding all else constant, such as worker productivity, the minimum wage law gives firms incentive to indulge whatever racial preference that they may hold.”

The table on page 380, adapted from one published by Walter Williams and supplemented by data from various publications of the Bureau of Labor Statistics, compares the general unemployment rate of males and the corresponding unemployment, by race, of young men 16-17 years of age. These are the people who have minimal skills and experience. The table shows when the outcomes discussed occurred.

The principal supporters of the minimum wage have been the labor unions and corporations that compete with the employers of teenagers. The unions know that when the minimum wage rises the wages of their members rise to maintain the differential between skilled and unskilled workers. The corporations in favor of it understand that the costs of their competitors will disproportionately increase as compared to their own.

It is difficult to understand why a government, ostensibly based on principles of democracy, can pass and enforce legislation that reduces opportunities for the most economically vulnerable segment of the population: black teenagers and white teenagers. From the standpoint of morality and equity, any legislation that makes it harder for teenagers with little skill or experience to enter the labor market should be unacceptable. As we have shown, the minimum wage law not only discriminates against young and inexperienced workers, it discriminates particularly against black youngsters. Not only should the minimum wage not be raised, it should be abolished. Democratic government can do no less.

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June 1995

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