All Commentary
Tuesday, December 1, 1987

A Reviewers Notebook: The Politics of Unemployment

We are living in an age of deregulation. It has paid off in oil prices, in trucking, in airplane tickets, and in telecommunications. But the politicians, mindful of the big unions, persist in a refusal to apply deregulation to wages.

Hans F. Sennholz, who is well known to readers of The Freeman, argues that the political fixation on a compulsory minimum wage is a primary cause of unemployment. He is inexorable about his contention in a no-holds-barred book called The Politics of Unemployment (Libertarian Press, Spring Mills, PA 16875, 356 pp., $19.95 cloth). He also deals with a lot of other things that keep wages from falling to market-clearing levels that would permit full employment. There is the Davis-Bacon Act, which keeps construction costs high. There is the Wagner Act and the Norris-La Guardia Anti-Injunction Act and the Railway Labor Act of 1926. All of them bear out Ludwig von Mises’ contention that interventionism imposes costs that hurt the ultimate consumer, to say nothing about investors who are being robbed of their capital. But the coercive minimum wage is Hans Sennholz’s bête noire.

Walter Williams has thoroughly exposed the effects of the minimum wage on young people, particularly black teenagers. But this, according to Sennholz, is just the tip of the iceberg. Recent research, he says, confirms that “only about one-third of low-wage earners are teenagers; almost one-half are twenty-five to sixty-four years of age; two-thirds of the low-wage population are believed to be female; and some ten per cent are individuals sixty-five years old or older.” Taken together, low-wage earners comprise some ten per cent of the American labor force. Any further rise in the minimum wage would make it uneconomic for an employer to hire people who can’t earn their keep.

Sennholz is concerned that the unemployment rate of black youth in recent years has ranged between forty and fifty per cent, which is double the rate for white teenagers. But he is equally concerned for unskilled women, and especially unskilled workers in hotels, restaurants, hospitals, laundries, and automotive service stations. These workers must live continuously with the danger of being fired when the minimum wage is raised.

Toward the end of his book Sennholz zeroes in on Puerto Rico. Puerto Ricans, being U.S. citizens, can quit their tropical island if better opportunities beckon on the mainland. Some 1.5 million have gone to the continental U.S., leaving 3.5 million at home, where they welcome remittances from their departed kin.

Sennholz says the fact that the unemployment rate in Puerto Rico often greatly exceeds the U.S. national average is puzzling. The federal government levies no taxes on Puerto Rico save for Social Security, workers’ compensation, and other labor benefits. Puerto Rican residents pay no taxes on income earned from local sources. And the U.S. government employs thousands of Puerto Ricans at the Naval Station at Roosevelt Roads and other Federal facilities. But none of this keeps the island from being what Sennholz calls “an overcrowded poorhouse” where “many people subsist on minimum incomes” supported by alms and transfer payments.

Having described the Puerto Rican situation as puzzling, Sennholz proceeds to take the puzzlement out of it. Puerto Rico, he says, “is probably the world’s most vivid example of the asininity and absurdity of labor legislation. It demonstrates so cogently and convincingly that minimum wage laws, and other labor legislation that raise the cost of labor, do not improve economic conditions, but instead make them immeasurably worse.”

Puerto Rico is poor in natural resources. But in a free economy, unconstrained by labor legislation, economic production that is labor-intensive would gravitate to the island. With his attention to detail Sennholz mentions table and household linens, embroidered and drawn-work by hand, clothing embellished with fancy stitching and hand-rolled edges, appliqué work on towels, bridge sets, scarves, doilies, and pillow cases. These could be produced on the island and sold on the mainland. “The American people, as consumers,” says Sennholz, “would be greatly enriched by the productive efforts of some two million adult Puerto Ricans.” As things stand now, however, American consumers of scarves, doilies, and what-not buy from Hong Kong and South Korea.

On the U.S. mainland the minimum wage may amount to one-half the average industrial wage rate and may affect some ten per cent of the working population. In Puerto Rico, the same minimum approaches the full industrial wage and hits a vast majority of the working people. “The aggregate effect of the U.S. minimum wage on Puerto Rico,” says Sennholz, “is one of incredible devastation and humiliation. Some 25 per cent of the working population are presently unemployed, 10 to 15 per cent are under-employed, some 10 per cent are subsisting in self-employment or primitive farming, 18 per cent no longer participate in the labor market, and 5 per cent subsist on public assistance.”

Sennholz calls this “gruesome.” On the mainland the figure for incomes lost through interventionism comes to $196 billion as estimated by Morgan O. Reynolds in his Making America Poorer: The Cost of Labor Law (Cato Institute, 224 Second Street S.E., Washington, DC 20003, 218 pp., $21.95 cloth, $9.95 paper). This is gruesome, too. Luckily, however, human beings find ways of getting around the gruesome statistics.

Sennholz does not advocate breaking the laws. He would prefer to see Congress repeal them. But it is his duty as a commentator to take human nature as he finds it. Many Americans, he says, enter the labor market via the underground. They learn as kids that pocket money earned through odd jobs doesn’t get into their parents’ income tax reports. The underground economy tempts young people who are budding entrepreneurs to take off-the-book jobs which may be irregular but profitable. These young entrepreneurs, says Sennholz, “are everywhere, in towns and in the country, and are numbering hundreds of thousands.”

So the situation, as described by Sennholz, is not as “gruesome” as one might suppose. Sooner or later our legislators will learn that stupid laws cannot be enforced. The tougher the labor legislation, the more the underground will tend to grow.

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.