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Minimum Wage Ignorance

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It is absolutely amazing to me that so many people still don’t get it on the minimum wage. How is it really possible for any intelligent person to genuinely believe that all a government has to do to relieve poverty is enact a law? If that’s’ the case, why is there still poverty in the world? The fact that so many people really believe this myth is proof positive that the sooner the government gets out of the education business (e.g., public schooling), the better off everyone will be.

California is raising the minimum wage from $10 an hour to $15 an hour. Not surprisingly, the statist establishment, liberals and conservatives alike, is going gaga over the idea. The statists are saying that raising the minimum wage will help those at the bottom of the economic ladder — that is, low-income earners.

That’s just sheer economic nonsense. In fact, the minimum wage is a direct attack against the very people who are purportedly helped by it — the poor — those who earn low incomes.

Businesses are in business to make a profit. They know that if they sustain losses, they will go out of business. Since they want to stay in business, they do their best to earn profits and avoid losses.

Let’s assume that a business has an annual payroll totaling $1,000,000 and annual gross revenues of $500,000. Do you see the problem? The business is incurring a sizable loss. If things stay that way for long, the business will go out of business.

There is always a maximum amount of payroll that any business is willing to pay in order to make a profit. If payroll starts to exceed that amount, whatever it might be, the business will lay off one or more workers in order to continue making a profit and to stay in business.

This is what statists just don’t get. They see a business and automatically assume that it can increase its payroll expense regardless.

Let’s make the analysis simpler. Let’s narrow it down to two people — the employer and the worker. If the state enacts a law requiring the employer to pay its workers $15 an hour, the employer will ask himself a very simple question: Is this worker worth $15 an hour to me? If he concludes that the worker is worth more than $15 to him, he will hire him. If he concludes that he is worth less than $15 an hour to him, he won’t hire him.

If the worker is already hired, the same questioning process takes place. If the employer decides that the worker isn’t worth $15 to him, he lays him off.

If a business wants to remain in business, why in the world would it hire someone that is losing it money? That is, why hire a person whose worth is $13 an hour when the law requires the employer to pay him $15 an hour? By hiring the worker, the employer loses $2 an hour every single day.

Therefore, the principle is very simple to understand: Once California’s minimum-wage law is enacted, every single person whose labor is valued by employers at less than $15 an hour is not going to be hired. If he already is hired, he’s going to be laid off.

The principle is no different at $10 an hour. Everyone whose labor is valued at less than $10 an hour goes unemployed.

Would you like a good example of this phenomenon? Black teenagers, especially those who come from poor or low-income families. They are among the most prominent victims of minimum-wage laws. They have a chronic, permanent, ongoing unemployment rate of around 30 percent. That is a very high rate of unemployment.

Statist experts scratch their heads in befuddlement over the chronic unemployment rate among black teenagers. They conduct studies. They hold meetings to analyze the problem. They just can’t figure out why there is such a permanent rate of unemployment among black teenagers.

Needless to say, they summarily dismiss the notion that their beloved minimum-wage law is the cause. That would mean questioning one of their favorite welfare-state programs.

But the minimum wage is the cause of the chronic high unemployment rate among black teenagers. A black teenager walks into a business and asks for a job. The employer conducts his interview and concludes that prospective worker isn’t worth $10 an hour to him. That is, if he hires the teenager, he’s going to lose money. He’s in the business to make a profit, not sustain losses. He decides to not hire the worker. Every other employer makes the same decision.

Suppose, however, that the black teenager says, “I’ll work for $5 an hour.” Now, the employer thinks, “This kid isn’t worth $10 to me but he is worth $7 to me. I can make $2 an hour profit off of him.” The employer decides to hire the teenager … but then remembers that the state’s minimum-wage law makes it illegal for him to do so.

Owing to misguided statist benevolence, the teenager remains without a job — a job where he could learn skills, a work ethic, how to deal with customers, how to make a profit, and other aspects of the business world. Instead, he goes unemployed and most likely ends up in the drug trade, owing to the enormous profits that the U.S. government has produced in this sector of the economy with its drug war. He also likely ends up in a state or federal penitentiary for drug-war violations. At his sentencing hearing, the judge will undoubtedly chastise him for not having gotten an honest job before imposing a 20 or 30 year jail sentence on him.

Here’s an interesting question: Why does California stop at $15 an hour? Why not $50 an hour? $100 an hour? If $15 an hour helps the poor, wouldn’t $100 an hour help them even more?

Again, the analysis is the same: Employers will hire only those people whose labor is valued at $100 or more. Everyone else will go unemployed. Of course, the employment rate would be much higher with a $100 an hour minimum wage than with a $15 or $10 minimum wage.

We see this phenomenon in Puerto Rico, an island that belongs to the United States. It has a much lower standard of living than the states of the United States. And yet, as a colonial possession of the United States, it is required to comply with U.S. minimum-wage laws. Since its standard of living is so much lower, imposing a $10 minimum wage on Puerto Rico is like imposing a $100 minimum wage on the United States. So, not surprisingly Puerto Rico has a chronic, permanent unemployment rate of 12 percent. That’s because there are lots of people in Puerto Rico whose labor is valued at less than the established minimum.

If there were no minimum-wage laws, everyone who wanted to work would be able to find it. That’s the way the laws of supply and demand work in an unhampered market economy. Unfortunately, there are still to many people in the world who honestly believe that public officials can repeal the laws of supply and demand. And the people who pay the biggest price for that myth are the poor — those at the bottom of the economic ladder.

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.