Secretary Tom Perez
Department of Labor
Department 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 thus 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.
The Capitalist Economist
Pepperdine University Professor Emeritus of Economics
Author: Capitalism: A Treatise on Economics
and other titles
Website: www.capitalism.net
On Twitter @GGReisman
