Minimum wage laws ignore basic economic principles

If you want an accurate measure of unemployment in the United States, don’t ask the federal government to make your calculation. According to them, unemployment is at 9.2 percent. 

But if you look at the calculation closely, you will see this number is misleading. The 9.2 percent does not include those workers who gave up looking for work or those who are underemployed.

If you factor in these workers, the percentage of unemployed is more like 16.2 percent. Experts call this percentage the “real” unemployment rate.

Regardless of which percentage you look at, both have been on the rise since the beginning of the recession. In response, politicians have offered up various solutions ranging from government stimulus programs to tax breaks.

One solution politicians have not looked at, but should, is eliminating minimum wage laws.

Since its adoption early in the 20th century, minimum wage laws have ensured the unemployment rate amongst teens and young adults is roughly twice that of the general population’s unemployment rate.

The reason why boils down to simple economics:

When a worker enters the job market, he comes with a certain set of skills. It is the employer who sets a value to those skills. Highly valued skills command a high salary while lower valued skills bring with them a lower salary.

When the government mandates employers to pay their workers a certain wage, what they do is ensure that those workers whose skills are not valuable enough to justify such a wage stay unemployed.

Therefore, minimum wage forces employers to make tough decisions. They can either hire the worker and pay them more than their skills are worth, thus partaking in a form of charity.

They can not hire the worker and instead try to find someone else whose skills are more in line with the wage the government mandates. Or, as a third option, they could not hire anyone for the position at all.

For this reason, we can see why minimum wage is most detrimental to high school and college students and results in a higher unemployment rate for their demographic. Compared to their older colleagues, young people have had less time to develop their skills, therefore their work is of less value.

Why this basic economic understanding has eluded politicians for decades is hard to understand. Early supporters of minimum wage laws understood very well the effects of such a policy.

Thomas C. Leonard of Princeton University argues that minimum wage was initially introduced in the U.S. as part of the eugenics movement’s effort to drive “unfit” races out of the country.

Those within the movement believed certain “unfit” races did not possess the skills necessary to warrant a wage higher than what was set at.

Therefore, the workers would be unable to find work and would have no choice but to leave the country.

Perhaps there is no greater example of what minimum wage laws can do to an economy than what happened in American Samoa.

In 2007, Congress, in its infinite wisdom, decided to raise American Samoa’s minimum wage from $3.76 to $7.25 by 2014. Soon, the island known for its tuna canning industry began losing employers.

Chicken of the Sea left with 2,041 jobs and Star Kist also began laying off employees. Before long, a fourth of those who were previously employed lost their jobs.

President Obama tried to slow the job loss by stopping future wage increases, but the damage was done. The jobs were off to Thailand where workers could be paid 60 cents an hour.

American Samoa is one of the easiest places to see the damage minimum wage laws can cause to an economy’s employment rate because of its size and unique economic makeup.

In America, however, minimum wage laws cause similar damage to teens and young adults.

Our size just allows politicians to ignore its effects.

­— nperrino@indiana.edu