November 27, 2010

Minimum Wage

Our class discussion last week on min. wage really peaked my interest. Based on our models, it is easy to see why a min. wage would lead to unemployment ( excess supply of labor ) but I wanted to know WHY this would impact teens and black members of the work force more than others. So...I started reading...and reading...and reading...and there is A LOT of research out there on this subject, some of it good, and some of it....well let's just say the arguments I found FOR a min. wage seemed to me to be ideological and NOT economically sound.

I began by looking at the actual unemployment rates and teens and blacks are significantly higher than other categories. According to the BLS, teen unemployment stands at 27.1% and black unemployment at 15.7%...MUCH higher than the national average.

The arguments to explain this were most clearly articulated by Thomas Sowell, an economist at Stanford University. His arguments state that:
According to Sowell, when we legislate min. wage, we fail to account for the movement of real wages in the economy between levels of worker. By standardizing wage increases, policy makers and politicians stop looking at the evidence and escalate the wages of the lowest level of worker on a schedule without accounting for the wages of the experienced worker, which creates a disequilibrium in the wage structure.

The result of this situation and a min wage is that unskilled workers, statistically teens and blacks, are legislated to a wage that is relatively the same wage as a skilled worker. Thus, when firms choose to hire labor, they are faced with a labor market providing two levels of skill at the same cost. Facing that choice, firms will of course choose to hire an experienced worker over an inexperienced worker given the costs the firm incurs to train a new worker, clearly an inexperienced worker is a larger investment than an experienced one.

If there was no floor in place, inexperienced workers could bargain for a lower wage and obtain employment from firms who are, of course, seeking to maximize profits. These firms would be willing to hire more labor at a lower price and invest in their long term productivity by providing training. In addition, this would free up resources on the firms end for them to then invest in capital, thus in the long run, enabling them to provide even more jobs.

It seems to me there is a cyclical impact here in the unemployment cycle that min. wage negatively reinforces. It also occurs to me that the min. wage policies hurt those that they were intended to help, and I can't help but wonder why they are still a matter of public policy. Based on my readings in Prof. Eubanks other class, I can't help but think there must be either A) a special interest at work with something to gain from a min. wage or B) a political football for the politicians to use against the rationally ignorant public who is unaware of the negative economic impact of the policy.


Larry Eubanks said...

Maybe a good choice would (A) would be unions?

Did you know that Sowell was one of my heroes?

Courtney Camelin said...

Nope I sure didn't but I can understand why. I am reading Intellectuals & Society right now and have almost all his books. He's fantastic.