7.13.2007

Why A Higher Minimum Wage is Bad for Poor People

In his seminal book, "Free to Choose," Milton Friedman discusses the mechanics behind why a higher minimum wage is bad for poor people.  It seems counter-intuitive, especially since proponents of a higher minimum wage are self-styled defenders of the poor.  (Although, and maybe I'm not well-read enough, but I haven't yet read where the real defenders of the poor are arguing for a higher minimum wage.  Warrants mentioning.)

But Friedman puts it this way (and I'll update the numbers, since he wrote this some 30 years ago).  Different people have different skills that are valued at different rates, which translates into higher or lower wages: a chemist usually makes more than a burger flipper.  It is also true that the same people have different skills over time, which are valued at different rates: you usually can earn more at 38 than at 18.  There are some people and some skills for which a wage below the government-mandated wage is a fair wage: the marketplace values a service at, say, $6.50 per hour, and there are people out there who are willing to render that service for $6.50 per hour.   It may not be much, but it's a foot in the door that allows a person to build experience and skills for an even better job down the road.

A minimum wage says that those intersections won't happen anymore, and that for some people starting at the very bottom of the ladder of success, the first run on that ladder is unreachable to them.  In effect, a minimum wage forces employers to discriminate against low-skilled workers.  Their choice, in our previous example, is to pay that person $7.15 per hour, or the appropriate rate of $6.50 plus $0.65 per hour in charity, or to not employ that person.  As Friedman puts it, "It's always been a mystery to me why a person is better off unemployed from a job that would pay $7.15 an hour than employed at a job that does pay $6.50 an hour."

But you might argue that what happens is that that employer bites the bullet and pays that extra $0.65 an hour, and that extra $0.65 an hour makes the difference between a family starving and a family making it.  Except that history tells us otherwise.  In the 1950's, the unemployment rate was four percent, and ten percent for teens, to be expected for people just entering the workforce.  Importantly, it was relatively equal for white and black teens.

Then the minimum wage was pushed upwards considerably.  By the time Friedman wrote his book in the 1970's, unemployment was at 15-20 percent for white teenagers and 35-45 percent for black teenagers.  Here Friedman gets downright frisky: "The government first provides schools in which many young people, disproportionately black, are educated so poorly that they do not have the skills that would enable them to get good wage.  It then penalizes them a second time by preventing them from offering to work for low wages as a means of inducing employers to give them on-the-job training.  All this in the name of helping the poor."

Indeed, all in the name of helping the poor.  I buy a lot of the arguments of the people advocating for a higher minimum wage.  But let's not think that to be for a higher minimum wage means to be for the poor, and to be against it means to be against the poor.  It's not quite that simple, and in fact that might be completely backward.
 
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