An op-ed in the Los Angeles Times makes me feel sorry for many college students, at least many of those who take economics courses in their respective schools. In fact, the op-ed even causes me to feel sorry for the people at mainstream newspapers who decide which op-eds to publish in their papers.
The op-ed in question is written by a Duke University student named Caroline Petrow-Cohen, who is a summer intern at the Times. Her piece takes California Republican gubernatorial candidate Larry Elder to task for favoring a repeal of the minimum wage. As Elder succinctly puts it, “The ideal minimum wage is $0.”
That idea horrifies Petro-Cohen. She is convinced that if the minimum wage were repealed, workers everywhere would immediately be relegated to subsistence wages. That’s because, she says, businesses always have more leverage than workers. Without a government-mandated wage floor, all those rapacious business owners, whose only goal is to make a profit, would immediately drop their wages to a few dollars per hour or worse.
Unfortunately, but not surprisingly, Petro-Cohen fails to address a rather obvious question, one that is contrary to her thesis. The question is this: Why do many businesses pay their workers more than what the minimum wage requires them to pay?
After all, if Petro-Cohen’s thesis is correct, that should not be happening. Under her reasoning, every business would pay no more than what the government is requiring. If the minimum wage, say, is $10 an hour, then no business would be paying more than $10 an hour.
Yet, that simply isn’t reality. We know, as a fact, that many businesses pay their workers more than what the law requires them to pay with the minimum wage. What’s up with that? Why doesn’t Petro-Cohen take the time to address that phenomenon? Why didn’t the editors at the LA Times ask her to address that point in her article?
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The notion that employers always have more economic leverage than employees is silly. Oftentimes in various industries, there is a huge demand for workers and a large scarcity of workers. Just ask California farmers about that. When that happens, the workers are in the driver’s seat. That’s why many businesses end up having to pay more than the government-mandated minimum wage.
Regardless though of which side has more leverage, what Petro-Cohen fails to understand is that in every wage transaction, both sides benefit from their own subjective perspective. We know this because they are both voluntarily entering into the transaction. By doing so, they are both giving up something they value less for something they value more. If they weren’t benefiting from their own personal, subjective perspective, they wouldn’t enter into the transaction.
Let’s assume an inner-city black teenager seeks a job at Amazon. Petro-Cohen would undoubtedly say that this is a perfect case of inequality — the big, rich, powerful corporation against the impoverished worker who lacks a high school degree and a college education. She would say that that teenager needs to be protected with a government-mandated minimum wage.
Let’s assume, however, that Amazon and that black teenager both agree on a wage rate of $5 an hour. Petro-Cowen would undoubtedly exclaim, “See! What did I tell you? That’s why we need the minimum wage — to protect black teenagers from being exploited by big, capitalist corporations who just want to make a buck.”
But she fails to acknowledge one big problem: It might not be worth it to Amazon to hire that black teenager for $15 an hour. Not even at $10 an hour. Owing to his lack of work skills and education, Amazon might decide that it is going to lose money by hiring him. Businesses are not in the business of losing money.
So that minimum wage that Petro-Cohen is so proud of ends up producing an unemployed black teenager, one who would be more than willing to work for the $5 being offered by Amazon.
And in fact, there has been a chronic unemployment rate of 30 to 40 percent among black teenagers for decades. I wonder why Petro-Cohen failed to address that problem in her op-ed. I would love to know how she explains that phenomenon.
There is another point that Petro-Cohen failed to address in her op-ed: that many potential inner-city start-up businesses are unable to start up owing to the minimum wage. Imagine that someone with little capital wants to start up a business by offering inner-city youth a dollar an hour in exchange for learning on how to start up and manage a business. You know, sort of like those college students from well-to-do families who go to Washington and work for free. Alas, the minimum-wage precludes those potential start-up businesses from starting up. It’s one of the unseen consequences of government intervention into economic activity.
The famous libertarian economist Henry Hazlitt put it perfectly in his excellent book Economics in One Lesson, which should be required reading for every college student in America:
The first thing that happens, for example, when a law is passed that no one shall be paid less than $9.00 per hour is that no one who is not worth $9 per hour to an employer will be employed at all. You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment. You do harm all around, with no comparable compensation.
Indeed, here are some final questions for Petro-Cohen, in case she ever decides to revisit the minimum-wage issue: Why settle for $15 an hour? Why not make the minimum wage $100 an hour? Wouldn’t workers be better off earning $100 an hour? If Petro-Cohen can figure out the answer to those questions, she’ll have a better understanding of economics than most economics professors at American universities and, for that matter, at most editorial staffs at mainstream newspapers.