New School Politics

Minimum Wage Pains

Ryan | 14 02 2007

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It has been less than a month since the new Congress passed a minimum wage increase and already employers and employees are bearing the brunt of it. As I said before it was passed in my article “Abolish the Minimum Wage”, it is not as if this should take us by surprise–as the fact that a minimum wage increases unemployment is only economically logical in accordance to the law of demand–but it only better illuminates the irrationality of politicians who claim that government decrees will make everyone richer while simultaneously masquerading around as if they know economics.

With Arizona as a case-study, The Arizona Republic published an article on the early effects of the new miminum wage:

Mark Messner, owner of Pepi’s Pizza in south Phoenix, estimates he has employed more than 2,000 high school students since 1990. But he plans to lay off three teenage workers and decrease hours worked by others. Of his 25-person workforce, roughly 75 percent are in high school.

“I’ve had to go to some of my kids and say, ‘Look, my payroll just increased 13 percent,’ ” he said. ” ‘Sorry, I don’t have any hours for you.’ ”

Messner’s monthly cost to train an employee has jumped from $440 to $580 as the turnover rate remains high.

“We go to great lengths to hang on to our high school workers, but there are a lot of kids who come in and get one check in their pocket and feel like they’re living large and out the door they go,” he said. “We never get our return on investment when that happens.”

Microeconomic case-in-point: if you a commodity that a business buys becomes–in this case by means of government price fixing–more expensive, they will buy less of it. It is not as if this is tricky stuff; Econ 101–supply and demand–you all know how it works.

And in the case of a price floor, it is the cheapest of a given commodity that will suffer. Among labor this generally encompasses part time and very poor workers, especially teenagers, which explains why for instance one in three black teenagers is unemployed (compared to one in nine in 1948). The AZ elaborates:

For years, economists have debated how minimum-wage increases impact the teenage workforce.

The Employment Policies Institute in Washington, which opposed the recent increases, cited 2003 data by Federal Reserve economists showing a 10 percent increase caused a 2 percent to 3 percent decrease in employment.

It also cited comments by noted economist Milton Friedman, who maintained that high teen unemployment rates were largely the result of minimum-wage laws.

While I am not a fan of using statistics in making economic judgments (theory must always preeminent) I think the plethora of statistical data of the damage a minimum wage can do to employment is in and of itself enough to convict it of economic ignorance run amuck.

The article gives more examples of small businesses and young adults suffering:

Tom Kelly, owner of Mary Coyle Ol’ Fashion Ice Cream Parlor in Phoenix, voted for the minimum-wage increase. But he said, “The new law has impacted us quite a bit.”

It added about $2,000 per month in expenses. The store, which employs mostly teen workers, has cut back on hours and has not replaced a couple of workers who quit.

Kelly raised the wages of workers who already made above minimum wage to ensure pay scales stayed even. As a result, “we have to be a lot more efficient” and must increase menu prices, he said.

While most of the state’s 124,067 workers between the ages of 16 and 19 made well above $5.15 per hour before the change, the new law has created real-life economic opportunities.

The worst economic effects of this are that it is not even like governments spending that are harmful to capital accumulation. The minimum wage is at heart a regulation that does not even divert capital (like government taxation would), but rather stops it from being utilized and grown in the first place. The rate of unemployment we see rise and prices that we see inflated will be the consequence of the government stopping the economy from operating to the full capacity that its resources allow.

And the greatest damage, ironically, is done to the youngest and the least fortunate among us, who need employment the most–not just for financial reasons either, but to gain valuable experience in the workplace during their formidable years.