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Minimum Wages Deny Jobs to Youth

March 9, 2015

 

 

At the first suggestion that minimum wages and penalty rates might be subject to review by the Productivity Commission, the ACTU hit the airwaves and the streets to defend their hard won rights. Rights that had been won by physical, economic and political coercion were not to be trammeled by rational debate; the proposals were offensive.  Economics journalist, Peter Martin wrote that there was no evidence to support the contention that minimum wages had a negative impact on employment.

 

Those most adversely affected by minimum wages are those out of work, those for whom the jobs do not exist at that rate. They are not members of trade unions; the unions have no concern for them.

 

Peter Martin should know better than to rely on historical evidence to support his case. Attempts to define economics by what has happened historically fail because they are subject to individual, different interpretation (or understanding) of what happened. Economic society is so complex that analysis needs to be based wherever possible on reason, as there are always multiple interpretations of real-life events. The champions of logically incompatible theories claim the same events as proof that their point of view has been tested by experience. 

 

Wage controls are a specific case of price controls and a most insidious one. If an employer is obliged to pay higher than the market rate then the chances are the job will not exist.  If it does, it will be in a marginal business at risk of going broke. Then the job will disappear. That is, fixing minimum wage rates leads to unemployment. The government that regulates wages must inevitably bear the burden of unemployment benefits created by its own policy. Minimum wage rates, whether enforced by government decree or by labour union pressure and compulsion, are useless if they fix wage rates at the market level. But if they try to raise wage rates above the level an unhampered labour market would have determined, they result in permanent unemployment of a greater part of the potential labour force.

 

The concept of the minimum wage grew out of the concern that wages needed to be sufficient for a man to provide for his family, in particular food, shelter, education and medical services. A wage needed to be sufficient for the dignity of man. In Australia, in 1907, The Conciliation and Arbitration Court brought down the famous Harvester Judgment, which established the basic wage. This became the foundation for controlled wages for decades. Justice Higgins concluded that a basic wage of 42 shillings ($4.20) per week, or seven shillings per day, for an unskilled man was the minimum amount that he and his family could live on. This was an increase of 6 shillings a week or 17 per cent. Unfortunately, this well-meaning decision misunderstands the interplay of prices in an economy and the consequences for job creation. It is all very well to have a higher wage, but that only applies if you have a job. Also, as wages are the major component of goods and services, higher wages lead to higher prices; a foolish and unending spiral.

 

Minimum wages and restrictions on the employer’s ability to fire poor performers favour those in work at the expense of those out of work. They dissuade entrepreneurs from creating jobs. They create unemployment. They particularly disadvantage the young who miss out on the work experience and training that would qualify them for better jobs. In most Western countries, unemployment among the young is often two to four times the average level. There is substantial evidence[1] that many low wage workers are in relatively high-income households and that poor households are usually poor because members of the households are out of work. Under this view, facilitating jobs growth should take precedence over raising wages of those in work. Minimum wage laws should not be seen as benign. They are a curse. They rob the young of self-esteem, of purpose and of life. They maintain households in poverty.

 

If we wish to increase wages then we need a better mechanism. Financial journalist, Henry Hazlitt, who wrote for The New York Times for twelve years from 1934 and then for twenty years for Newsweek, explains:

We cannot distribute more wealth than is created. We cannot in the long-run pay labour as a whole more than it produces. The best way to raise wages, therefore, is to raise marginal labour productivity. This can be done by many methods: by an increase in capital accumulation – i.e. by an increase in the machines with which the workers are aided; by new inventions and improvements; by more efficient management on the part of the employers; by more industriousness and efficiency on the part of workers; by better education and training. The more the individual worker produces, the more he increases the wealth of the whole community. The more he produces, the more his services are worth to consumers, and hence to employers. And the more he is worth to his employers, the more he will be paid. Real wages come out of production, not out of government decrees.[2]

 

Minimum wages are keeping our youth out of work and out of the experiences that would lead to better future employment. We should resist the efforts of vested interests to retain their preferred position. Let the rational debate proceed. Let us give our young people a fair go.

 

 

 

For more, read my book The Fragility of Freedom: Why Subsidiarity Matters

 

 

 

 

[1] P. Lewis, Minimum Wages and Employment, Centre for Labour Market Research, October 2006

 

[2] Henry Hazlitt, Economics in One Lesson

 

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