David R. Henderson  

The Minimum Wage Harm that Few Are Talking About

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Ball State University economists Philip R.P. Coelho and James E. McClure wrote a short piece recently that makes an obvious and telling point. But even though it's obvious, few people who discuss the minimum wage are talking about it. And that's tragic.

They write:

Economic analysis focuses almost exclusively upon what will happen to unemployment with an increase in the minimum wages; ignored is the harm that current levels create. Minimum wages deprive the mentally and physically disabled, the least skilled, least educated and most inexperienced workers a chance to compete with more able, skilled, educated and experienced workers for jobs by working for lower wages.

They continue:
The "low" wages the disadvantaged are paid do not reflect the dollar value of the additional training, skills, education and experience they receive. Focusing solely on money wages obscures economic reality; the disadvantaged receive both money and additional human capital that only comes from being employed.

The evidence that the most disadvantaged of society are those most adversely affected by minimum-wage legislation is abundant; it is intuitive, empirical and anecdotal. On the intuitive level, about one in 700 babies are born with Down syndrome; most adults with it are unemployed, and most of those whom are employed are in sheltered workshops where they acquire few job skills. The law does exempt disabled workers (which presumptively includes those with Down syndrome) to be employed at sub-minimum wages. However, the regulations are so labyrinthine, obscure and subject to continual reviews that they may result in substantial sanctions that profit-seeking firms will justifiably ignore the possibility of employing the disabled at less than minimum wages. Rhetorical question: When was the last time you saw someone with Down syndrome working at Starbucks?


The evidence is intuitive and anecdotal. I'm not sure how empirical it is. But they make a good point.


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COMMENTS (15 to date)
Andrew_FL writes:

The point was made-though in an extremely in-artful, unfortunate way using language I won't repeat-In Peter Schiff's infamous interview on The Daily Show. The one where their graphics team confused supply with demand.

Arthur writes:

In Finland the companies gets compensations, if they hire handicap or someone, who has been unemployed for a long time.

Without a minimum wage in times, when there's no full employment in a society, wages would spiral down and finally whole economic system would collapse, because a debt based system can't handle deflation. Like we see in Spain and Greece, where government have to save the banks.

Rhetorical question or not, I will answer anyway. Most people aint wanna see disabled people serving their coffees or hanging around them all days. My father had a company in Finland and he had a handicap person working for him over ten years and this was in field of making wooden pallets.

Without minimum wage you could probably hire completely healthy person cheaper also, so why would you even then hire the disabled person? I thought we learned at 1930s, why we need social security and minimum wages. Markets aint gonna correct themself, without help of the government.

This didn't happen 2008 either. Without minimum wages people would have started to sell themselves with prices, that can't feed families and economy would have started to shrink, cause there's less demand and service sector would have had to start firing and spiral would have been ready.

Of course export companies would love this idea, but government would go down the drain in the next crisis.

Ideology is a funny thing, because often it doesn't have anything to do with the reality.

I have offered another, different argument against minimum wage. My argument focuses on work which will not be done rather than on workers who will not be employed.

Example: Suppose you have an apple orchard. Every year after the professional crew has finished picking most of your crop, there are still many apples lying on the ground. The pig farmer down the road will give you $2.50 a bushel for them.

Suppose a worker (I am assuming all workers have the same skill level for this task) can pick up three bushels in an hour. You (if you are a rational, profit-maximizing owner) will hire workers for this task if you can get workers for less than $7.50/hour.

If minimum wage is $7.50 or higher the apples will rot on the ground. That work will not get done, assuming there would be people willing to take the job.

Question for you, David. Is my argument new to you? Or known among pundits but not used because it lacks empathetic appeal?

Jon Gunnarsson writes:

@Arthur

If all that's stopping firms from paying very low wages is the minimum wage, then why do only a very small proportion of the workforce earn minimum wage? Clearly there must be some other factors pushing up wages.

You mention economic collapse in Spain and Greece, but both those countries have had a minimum wage for quite a while. Germany, on the other hand, only introduced the minimum wage at the beginning of this year, yet the German economy has done much better than most other European countries.

How does the Great Depression (which I assume you're referring to when you're talking about 1930) show that markets don't correct themselves? This was the first time in US history that the federal government intervened on a massive scale to try to fix an economic crisis and it was also the deepest and longest lasting economic crisis in US history. Surely that's evidence against government intervention, not for it.

David R. Henderson writes:

@Arthur,
Basically, what Jon Gunnarsson says.
@Richard O. Hammer,
Question for you, David. Is my argument new to you?
No. It’s a good argument and, although I have never used that particular example, I often point out, when discussing the minimum wage, the fact that marginal uses of labor will be cut out. That is, indeed, how we reach the conclusion that overall output is lower with a minimum wage than without.
Or known among pundits but not used because it lacks empathetic appeal?
I bet some pundits know it and some pundits don’t. Actually I think it has empathetic appeal.

Harold Cockerill writes:

Arthur,

America existed prior to 1930 and I would point to 1921 as a perfect example of what happens when government doesn't step in to "help" during a downturn. The economy resets by clearing out bad investments and dropping wages and prices then starts growing again. This had happened multiple times prior to 1930 and America had not turned into a black hole of misery.

You hit on exactly why the government has to interfere now though. The government is built on debt and deflation is intolerable. Massive debt is stupid and one of the hidden effects is the inability to allow the economy to reset itself and start growing again. Of course the pathetic level of growth we're experiencing now is not so hidden.

Sieben writes:

I don't like this post rhetorically. The kind of people who care strongly about helping the weakest members of society are also the kind least likely to accept any kind of libertarian alliance.

It's like you believe that if somehow you could convince liberals that free markets could provide goodies for the poor, they would change their minds and give up control. They won't. Politics in general is all about getting your hands INTO things so you can feel like you're a part of something. The most likely reaction to your post (other than outright hysteric denial) is that "well there should be government programs around to help these people! They shouldn't have to work for minimum wage; Handicapped people deserve a better life than that."

Libertarians would be a lot happier if they just focused on their own strength and independence. You can try to win an argument with a soccer mom by repeating the above conversation, or you can win the argument without saying a word by just being an Evolved Person who is so clearly above all that thrashing over low-brow entertainment politics.

Brett Gall writes:

In the past, the disabled were able to work in sheltered workshops for less than minimum wage. The CMS regulatory move toward greater competition and community integration in the areas of prevocational and day services, as well as other home and community-based non-residential services has led to the decline of sheltered employment opportunities for the severely disabled.

President Obama's Workforce Innovation and Opportunity Act has also led to other reductions in subminimum wage employment opportunities for certain populations of young disabled individuals.

Long story short, there have been historic income supports and sub minimal wage opportunities for disabled employment that I am not sure the economists are entirely transparent about.

Brett Gall writes:

Follow-up - in my city there are quite a few developmentally disabled individuals working in community integrated employment...and the place where it is most obvious in my city is in the coffee shops!

David R. Henderson writes:

@Brett Gall,
What city?

Tom West writes:

While I agree this is truly a price we pay, I question whether the dollar value of the additional training, skills, education and experience they receive is all that high.

The trouble is that in my experience, the vast majority value both things and employees by how much they pay for them.

Anyone whose worked in a larger business understands that management knows consultants are more valuable the more they had to pay for them. (I've once been in the stark position of being the (sort of) high priced consultant relaying workers suggestions because the business knew they weren't paying their workers enough for them to have good ideas.)

But it was visiting India that taught me the other side of the equation. That workers who were paid next to nothing could not be valuable enough to train or be given equipment to make them more productive or valued as human being at all.

Those who were unemployed (and thus might have potential) were more valuable than someone who acknowledged their lack of worth by taking a low paying job.

Then I came back to North America, and learned how poisonous it is to indicate that you accepted a low paying job anywhere on your resume. Better just to pretend you were unemployed for that period. Because most people will assess your competence and your value by how much your were paid.

I consider the increase in self-worth to be the most valuable asset of employment in low paying positions. I wouldn't count on the employer bestowing training, skills, or respect on their lowest paid employees.

People who, like DRH, offer such respect to individuals by the job performed aren't often found in the management of companies employing lots of low paid workers.

François Godard writes:

In my Canadian home town Walmart employs mentally deficient people including a friend of my family -- apparently Quebec's socialist regulation does not prevent them to do so, but maybe it's easier when you have a huge legal and HR department?

ThomasH writes:

I still think way too much interest is focused on the minimum wage compared to the myriad rules and regulations that make the corporate tax rate very different between different activities.

But ....

If the main problem with the minimum wage is the harm it does to people who are not employed because of it, why not spend a few electrons pointing out that a higher EITC could achieve the redistribution objective of a minimum wage with out harming the most employmentally disadvantaged.

Brett Gall writes:

@Dave Madison, WI.

Ann S writes:

@Jon Gunnarsson
@ Richard O. Hammer

Excellent point, Jon! Supporters of a high minimum wage (as far as I can tell) think that most low-wage jobs are ‘worth’ more than the minimum to the employer, yet employers are somehow colluding to keep the wages lower. If this were the case, then the imposition of a minimum wage should lead to a huge cluster of jobs right at the minimum.

If, on the other hand, there are jobs that simply aren’t worth more than so much per hour to the business, then imposing a minimum means that those jobs simply do not get done, so there’s no cluster of workers right at the minimum – instead, there’s just less growth and fewer jobs. This is the point Richard made.

Also, if there are specific workers that simply are not worth enough to employers (slow, not very accurate, don’t get much done), then imposing a minimum means that those workers simply don’t work at all, rather than their being paid the minimum.

The evidence seems to favor both people and jobs being cut out entirely. This means that disabled or low skilled people not only lose possible training, they lose the pride and dignity of contributing, the motivation and discipline of having to get something done, and possible social benefits. It’s cruel to take the choice away from them.

Last, speaking as the mother of a special needs child who has had to document the disability year after year for the school system, it’s hardly a perfect or painless system to have special exceptions that some people may qualify for, while others are still completely cut out of a job. Just having to document one’s disabilities would be humiliating, and the classifications are not always accurate or comprehensive.

As Thomas H says, the EITC is the way to go!

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