Dan McLaughlin

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To Home Page Latest Newsletter Column Archives Click to get these columns for your local paper	© 2006 Daniel J. McLaughlin Wages Laws And The Poor It is bitter irony that people, trying to do “good”, sometimes hurt the very people they seek to help. That is the case with trying to help the poor with living or minimum wage laws. Minimum wages have been an emotional and volatile subject for many decades. The reason that the issue has been so emotional is that people base their opinions on what they think the world should be like, instead of understanding what it is like. Emotion gets in the way of understanding. Most people are generous, caring and helpful. They don’t like to see people suffer. They don’t like to see poverty. They want people to have a better life. That is a great positive quality of the human race. Many people have religious convictions that call them to care for the poor, feed the hungry and clothe the naked. They feel compelled to do something. The frequent problem with people “doing something” is that those people don’t do something. They demand that government do something so they don’t have to. Getting someone else to do something makes them feel better without getting their hands dirty. The sad fact is that using government regulations to fight poverty is fundamentally flawed and always ineffective. It helps to understand that wages are simply the prices of labor services. There is no inherent difference from the price of any other item in the market. Just as there are different qualities of furniture or clothing, there are different qualities and values of labor. It is obvious what would happen if government regulation set a minimum price of automobiles at $20,000. There would be an immediate shift away from low cost cars. The only cars people would buy for $20,000 are those that are worth at least $20,000. Cars that previously sold for $12,000, $15,000 or $18,000 would just sit on the lot, even though there would be many customers willing to buy them at the lower cost. In the same way, there are people with low value skill sets. They have skills that people would be willing to pay a relatively low price for, but beyond that price, they might as well hire someone with a higher skill set who can be more productive. It has nothing to do with dignity or malice or any other emotional quality. It has to do with reality. By setting the price of their services above their productivity, they are destined to sit on the lot, the unemployment line in human terms, just like those lower priced, but still usable automobiles under price fixing. The effect of raising the minimum wage to $7.25/hour, as proposed, is that people who’s skills aren’t worth $7.25/hour will not be hired or will lose their jobs. In spite of the good intentions of “helpful” people, low skilled workers will be displaced by higher skilled workers. Unemployed youth with no developed skills will find it harder to land that first job to get skills. Poor people with low value skills will find it much harder to compete. That is, in fact, what happens. Even though the minimum wage is purported to help the working poor, the majority of the increase in wages goes to families far above the poverty level. The reason is that low wage jobs are typically entry level, not intended to be permanent career positions. Second earners and college students, who’s families already have significant income, are drawn into competition for lower level jobs by the higher pay. According to statistics from the Employment Policy Institute, only an estimated 12.7 percent of the aggregate increase in wages paid would go to poor families. The typical beneficiary of a minimum wage hike to $7.25/hour would belong to a family with a combined income of more than three times the poverty level. The flaw in minimum wage arguments is the same flaw that arises in discussions whenever the government fixes prices or manipulates supply, whether it be wages, wheat or gasoline. Manipulating the market always leads to negative consequences. The level of poverty, unemployment and every other measure of well being are statistically related to the level of economic freedom. For people who really have concern for those in poverty, the most effective actions would be, first, press to remove government from the economy so the general level of welfare will rise. Second, they should get their hands dirty and actually do something for the poor instead of just saying righteous things and demanding that someone else take care of it.
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Daniel Mclaughlin Copyright © 2006 [Daniel McLaughlin]. All rights reserved. Revised: 03/18/08

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Wages Laws And The Poor

It is bitter irony that people, trying to do “good”, sometimes hurt the very people they seek to help. That is the case with trying to help the poor with living or minimum wage laws.

Minimum wages have been an emotional and volatile subject for many decades. The reason that the issue has been so emotional is that people base their opinions on what they think the world should be like, instead of understanding what it is like. Emotion gets in the way of understanding.

Most people are generous, caring and helpful. They don’t like to see people suffer. They don’t like to see poverty. They want people to have a better life. That is a great positive quality of the human race. Many people have religious convictions that call them to care for the poor, feed the hungry and clothe the naked. They feel compelled to do something.

The frequent problem with people “doing something” is that those people don’t do something. They demand that government do something so they don’t have to. Getting someone else to do something makes them feel better without getting their hands dirty. The sad fact is that using government regulations to fight poverty is fundamentally flawed and always ineffective.

It helps to understand that wages are simply the prices of labor services. There is no inherent difference from the price of any other item in the market. Just as there are different qualities of furniture or clothing, there are different qualities and values of labor.

It is obvious what would happen if government regulation set a minimum price of automobiles at $20,000. There would be an immediate shift away from low cost cars. The only cars people would buy for $20,000 are those that are worth at least $20,000. Cars that previously sold for $12,000, $15,000 or $18,000 would just sit on the lot, even though there would be many customers willing to buy them at the lower cost.

In the same way, there are people with low value skill sets. They have skills that people would be willing to pay a relatively low price for, but beyond that price, they might as well hire someone with a higher skill set who can be more productive. It has nothing to do with dignity or malice or any other emotional quality. It has to do with reality. By setting the price of their services above their productivity, they are destined to sit on the lot, the unemployment line in human terms, just like those lower priced, but still usable automobiles under price fixing.

The effect of raising the minimum wage to $7.25/hour, as proposed, is that people who’s skills aren’t worth $7.25/hour will not be hired or will lose their jobs. In spite of the good intentions of “helpful” people, low skilled workers will be displaced by higher skilled workers. Unemployed youth with no developed skills will find it harder to land that first job to get skills. Poor people with low value skills will find it much harder to compete.

That is, in fact, what happens. Even though the minimum wage is purported to help the working poor, the majority of the increase in wages goes to families far above the poverty level. The reason is that low wage jobs are typically entry level, not intended to be permanent career positions. Second earners and college students, who’s families already have significant income, are drawn into competition for lower level jobs by the higher pay.

According to statistics from the Employment Policy Institute, only an estimated 12.7 percent of the aggregate increase in wages paid would go to poor families. The typical beneficiary of a minimum wage hike to $7.25/hour would belong to a family with a combined income of more than three times the poverty level.

The flaw in minimum wage arguments is the same flaw that arises in discussions whenever the government fixes prices or manipulates supply, whether it be wages, wheat or gasoline. Manipulating the market always leads to negative consequences.

The level of poverty, unemployment and every other measure of well being are statistically related to the level of economic freedom. For people who really have concern for those in poverty, the most effective actions would be, first, press to remove government from the economy so the general level of welfare will rise. Second, they should get their hands dirty and actually do something for the poor instead of just saying righteous things and demanding that someone else take care of it.

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