Tuesday 17 July 2012

Minimum wage (still) doesn't work

By Jeff Jacoby, Published TODAY, 16 Jul 2012

The United States Congress enacted the first federal minimum wage in 1938. A provision of the Fair Labor Standards Act, it covered about 6 million workers and set a wage floor of 25 cents per hour. 

It also cost a lot of people their jobs. The Labor Department reported that as many as 50,000 employees, mostly poor Southern blacks, were thrown out of work within two weeks of the law's taking effect. And the carnage spread. 

"African-Americans in the tobacco industry were particularly hard hit,'' wrote Mr David Bernstein in his 2001 history of labour regulations and black employment. "In Wilson, North Carolina, for example, machines replaced 2,000 African American tobacco stemmers in 1939." 

The economic pain inflicted by that first minimum wage law hasn't stopped Washington from repeating the same folly over and over. 

In the 74 years since the lowest hourly wage at which most Americans could be hired was set at 25 cents - the equivalent in purchasing power of about US$4 (S$5) today - Congress has raised the amount 22 times. The federal minimum wage is currently US$7.25 an hour, and a push is underway to raise it yet again. 

On Capitol Hill, Iowa Senator Tom Harkin has introduced legislation that would hike the minimum wage in three steps to US$9.80 per hour, a 35-per-cent increase. A more radical proposal by Representative Jesse Jackson Jr of Illinois would increase the wage floor immediately, to US$10 per hour. 

At the state and local level, too, legislators have been pushing for minimum-wage hikes. In New York City, a "living wage" measure passed over Mayor Michael Bloomberg's veto would require companies that receive public subsidies to pay their employees at least US$11.50 an hour, or US$10 plus benefits. 

Yet no matter how much politicians and activists may battle over minimum-wage laws, the real minimum wage in this country has never budged. It is $0. 

According to the Bureau of Labor Statistics, that is the hourly wage being earned right now by 12.7 million Americans - the 8.2 per cent of the work force that is currently unemployed. 


The pain of unemployment isn't evenly distributed among all population groups. It is much more severe among those with the least experience and skills. 

As of last month, the unemployment rate for black Americans had climbed to 14.4 per cent; among teenagers it stood at nearly 24 per cent. And the unemployment rate for black teens - the least skilled, least experienced subset of the workforce - was 44 per cent. 

Minimum-wage laws are typically thought of as a mandate on employers. In reality they constrain employees. As it stands now, the federal wage law tells workers that unless they can find a company willing to pay them at least US$7.25 an hour, they can't get a job. 

That may not seem like much of a barrier to Mr Harkin, one of Congress's wealthiest members, but it might as well be the Berlin Wall to an unskilled teen or young adult with no high-school diploma or employment history whose labour is only worth, say, US$5.50 an hour. 

No matter how much that person might leap at the chance to work for what he's worth, the minimum wage forbids it. Should Mr Harkin's bill become law, life will become even harder for those seeking entry-level employment. 


With the best intentions in the world, lawmakers cannot raise the value of anyone's labour to US$9.80 an hour merely by passing a law. Making it more expensive to hire workers who are just starting out doesn't advance beginners' prospects, it worsens them. 

Decades of economic research and empirical studies confirm what common sense should tell anybody: Boost the minimum wage beyond what low-skilled workers are worth, and more low-skilled workers will be priced out of a job.

That is why minimum-wage hikes are so devastating to those at the bottom of the economic ladder. 

Minimum-wage laws are not cost-free. When legislators raise the price of low- and unskilled labour, it's usually low- and unskilled labourers who end up paying the price. As 50,000 Americans found out in 1938, jacking up the minimum wage turns the least employable into the unemployable. 

It may not be easy to survive on US$7.25 an hour. But life gets a whole lot harder when your hourly wage is nothing.

Jeff Jacoby is an op-ed columnist for The Boston Globe and recipient of the Thomas Paine Award of the Institute for Justice in 2004.

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