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Minimum Wage From GOP, Dems Hurt Poor

The people of Florida chose, through referendum, a minimum wage of $15 per hour, the most conservative state so far to choose such a policy. The intention is to help the poor by setting a wage floor, thus increasing their pay, but good intentions don’t equal good results. That policy, like others that ostensibly benefit of the poor, is built on widely-held economic fallacies that even many economists fall for.

It is true that minimum wage laws often have less of an overt, immediate effect on overall employment levels than might be expected from such price controls. The fallacy, however, is treating the labor pool as an aggregate, as a generic resource or supply applied to a generic demand. Reality doesn’t happen in aggregates. All markets are, first of all, local, even for national or international organizations. There is no such thing as a national or state labor market. Large organizations just serve many unique local markets. The characteristics of a tiny mid-western town are nothing like those of a thriving metropolitan center. Their resources, needs, preferences, and people are vastly different.

People, in general, work within reasonable commuting distances from where they live. Those who are able to work virtually from home have an advantage, but even those people have a cost of living and other circumstances tied to the local economy. Even at the local level, however, there is not one unified labor market. There are separate markets for particular skills. Companies are willing to pay more for skills that will generate more sales or make the organization more efficient, and people with valuable skills will find it easier to earn higher wages. Those with low skills, such as teens and others new to the job market, do not add as much value and will likely earn low wages, but those low-paying jobs are the stepping stones to a future, higher-earning career. Careers don’t start at the top, and most people don’t remain at low paying jobs their entire lives, unless they have special circumstances or refuse to avail themselves to the many opportunities for improvement and advancement.

Prices in job markets, called wages, are determined the same way as those for automobiles. In a soft market, car companies have to offer steep discounts, often in the form of rebates and other incentives. When demand is low and supply is high, the sellers need to accept lower prices or people will just not buy. That is reality.

Similarly, when the mandated market price for a particular skill is too high for the level of demand for that skill, the bar is raised beyond what some people can jump, and they will remain unemployed. Problems arise when measuring effects, however, because higher wages induce competition from higher-skilled, more-educated workers. Such workers are more flexible and can perform lower skilled as well as higher skilled jobs, but the reverse is not true. Higher skilled workers will be hired before lower skilled workers because they can add more value and be more flexible in assignments. Thus, the minimum wage for low skilled workers falls to zero, because the legally-required higher wage makes them less employable. They are competed out of potential jobs by others drawn to their limited available markets by higher wages, and they earn nothing from a job they don’t have. In effect, the bottom rungs are cut off from the ladder of opportunity. Those people no longer get the opportunity to learn new skills and take responsibilities that move them up the ladder, even if the effect on overall unemployment is not significant.

It doesn’t matter which political party, persuasion, or ideology promotes the idea. Minimum wages tend to hurt the very people they are purported to help.

Dan McLaughlin is the author of “Compassion and Truth-Why Good Intentions Don’t Equal Good Results.” Follow him at daniel-mclaughlin.com

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