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In Other News, Water is Wet

One of the most beloved fairy tales in this country is that the Government, which seems unable to balance its own books, can by fiat, with no consequences to employment, tell employers that they must pay a minimum wage.  Economist Thomas Sowell, who, like me, began his career earning less than the then mandated minimum wage, explains what an appallingly bad idea this is:

One of the simplest and most fundamental economic principles is  that people tend to buy more when the price is lower and less when the  price is higher. Yet advocates of minimum wage laws seem to think that  the government can raise the price of labor without reducing the amount  of labor that will be hired.

When you turn from economic principles to hard facts, the case  against minimum wage laws is even stronger. Countries with minimum wage  laws almost invariably have higher rates of unemployment than countries  without minimum wage laws.

Most nations today have minimum wage laws, but they have not  always had them. Unemployment rates have been very much lower in places  and times when there were no minimum wage laws.

Switzerland is one of the few modern nations without a minimum  wage law. In 2003, “The Economist” magazine reported: “Switzerland’s  unemployment neared a five-year high of 3.9 percent in February.” In  February of this year, Switzerland’s unemployment rate was 3.1 percent. A recent issue of “The Economist” showed Switzerland’s unemployment rate  as 2.1 percent.

Most Americans today have never seen unemployment rates that  low. However, there was a time when there was no federal minimum wage  law in the United States. The last time was during the Coolidge  administration, when the annual unemployment rate got as low as 1.8  percent. When Hong Kong was a British colony, it had no minimum wage  law. In 1991 its unemployment rate was under 2 percent.

It therefore came as little surprise to me yesterday when the CBO estimated that raising the minimum wage would kill off half a million jobs in 2016:

 

President Obama’s proposal to raise the minimum wage to $10.10 per hour would cost 500,000 jobs in 2016, according to a report released Tuesday by the nonpartisan Congressional Budget Office.

The report also found hiking the wage from $7.25 per hour would raise income for about 16.5 million workers by $31 billion, potentially pulling nearly 1 million people out of poverty.

The White House and economic groups on the left immediately pushed back at the CBO’s conclusions on jobs even as they hailed the findings on poverty, saying its conclusions on jobs ran counter to other research.

“CBO’s estimates of the impact of raising the minimum wage on employment does not reflect the current consensus view of economists,” Council of Economic Advisers Chairman Jason Furman wrote in a blog post. “The bulk of academic studies, have concluded that the effects on employment of minimum wage increases in the range now under consideration are likely to be small to nonexistent.”

Given its findings on poverty alleviation, Furman told reporters the CBO report was an overall positive for the White House.

“Sometimes you have to have a respectful disagreement among economists,” Furman said in a conference call. “I think a lot of economists who have looked at [the] literature would summarize it differently than CBO has done here.”

Democrats are hoping to make the minimum wage a top issue in the 2014 midterms if the GOP blocks passage of a bill, but the CBO report would bolster Republican arguments for stopping a wage hike.

Go here to The Hill to read the rest.  I began working around eleven doing agricultural labor that was not covered by minimum wage laws.  I then went on to wash pots and pans at the country club in my hometown, doing dishes and scrubbing floors for a $1.55 per hour, a great job I held all during the last three years of high school. I had many other low wage jobs between high school and graduating from law school.  These early jobs taught me the importance of showing up, following instructions, working hard, getting along with people and a whole host of other job skills that have served me well all the days of my life.  I was not unusual:  most teenagers I knew had jobs back in the seventies, sometimes more than one.  The teen unemployment rate is now 20.7 percent, with the black teen unemployment rate being an astounding 38%, and the solons of the Obama administration, if this policy is passed, will drive it higher.  Ignorance in most areas of life can be a disaster.  When it comes to economics you can take out “can” and insert “shall”.

 

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Donald R. McClarey

Cradle Catholic. Active in the pro-life movement since 1973. Father of three and happily married for 35 years. Small town lawyer and amateur historian. Former president of the board of directors of the local crisis pregnancy center for a decade.

21 Comments

  1. My son started working at the tender age of 11. (They call it “volunteering”.) Five summers later (at the end of summer) they finally hired him–he is now 16. Now that he is on staff, he is very part time and doesn’t get called to “work” as much. He is deeply concerned what the proposed minimum wage hike laws will mean for his job (they have proposal in our state to raise the minimum wage up to $10.10, which is nearly $2 more than what he currently gets)–which is in a very competitive environment.
    .
    I can’t help but notice how the same people who want to raise minimum wage extol such things as volunteerism and unpaid internships. Personally, I think it is little more than State-sanctioned-high-school-required slave labor.
    .
    We could probably fix the illegal immigration problem in this country by eliminating State supported welfare and ending minimum wage laws. I can’t help but think many illegal immigrants are hired simply because they have a greater flexibility to working “under the table” in the underground economy.

  2. ” . . . many illegal immigrants are hired simply because they have a greater flexibility to working “under the table” in the underground economy.”
    .
    Exactly, and once legitimized, will form another Peoples’ Democratic Party voting bloc.

  3. I suppose another beloved fairy tales in this country is that the Government, which seemed unable to abide by its treaties with the American Indians, can by fiat, with no consequences, enforce contract law. Another is that the Government, which has willingly used terror as a weapon in both WW2 and the Cold War, can denounce and fight terrorism. Yeah, anyone can play that game, tearing down not only the government acts that you hate but also those you dearly love. Just don’t drag the Catholic Church into your fallacious reasoning. Donald R. McClarey speaks for himself and the owners of this web site, which (in spite of its name) does not speak for the Catholic Church.

  4. I dunno. If we go big, really big, with our magical thinking, maybe those half million lost jobs are going to come out of the two million lost FTEs due to Obamacare allowing people to escape job lock. Win-win!

  5. Howard,
    I’m trying in earnest to make sense of your rant. Are you suggesting that the government can (or should) force employers to hire or retain an employee at a wage such that the employer regards himself as better off without the employee?

  6. “Yeah, anyone can play that game, tearing down not only the government acts that you hate but also those you dearly love.”

    Thank you Howard for a demonstration of the inability of some people to grasp the simplest economic concepts.

  7. Was it Reagan that quipped:

    “An economist is someone who tells you why something that works in practice can’t work in theory”

    I guess the corollary to that is:

    “An economist is someone who tells you why something that can’t work in practice works in theory”

    Reminds me of that joke about the economist stranded on a desert island trying to open a coconut with his bare hands – “First, assume a hammer”.

  8. Teen unemployment was quite high in the latter part of the 1970s as well. The NAIRU, the rate of unemployment congruent with price stability, was on an upward trajectory throughout the 1960s and 1970s and was at its peak (prior to 2008) around about 1979.

  9. I guess the point of raising the minimum wage IS to secure “another Peoples’ Democratic Party voting bloc.”

    Abit like how the left here rally for the illegal immigrants- they hope that when the illegal are made citizens, they will vote for them for life- regardless of how skewed their policies are.

  10. Half-a-million unemployed isn’t an unfortunate consequence of an increase in the minimum wage, its a half million more people motivated to vote for assistance from government.

  11. Re illegal immigrants being hired to work “under the table”: this happens less often than people think. Many, perhaps even the majority, of illegals are hired to work for regular wages and get regular paychecks with taxes withheld from them — often using fake or stolen Social Security numbers for that purpose. It happens so frequently that 1) the IRS makes accomodations for persons who don’t have SSNs (the vast majority of whom are illegals) to file income tax returns using Taxpayer Identification Numbers in place of the SSN, and 2) the Social Security Administration acknowledges that contributions from workers of questionable legal status amounts to billions of dollars annually, and has the same effect as if the Social Security tax rate were raised by a couple of tenths of a percent. In other words, illegals are making payments into the Social Security system (which, contrary to rumor, they are NOT allowed to draw benefits from) that at least partly compensate for those not being made by the children Baby Boomers and Gen Xers did not have.

  12. Perhaps Elaine, but I doubt if most of the illegal aliens congregated as work pools outside of Home Depots are being hired on the books, ditto servants, ditto those who tend lawns and ditto those who work in restaurants for non-chains. Additionally I have zero confidence that some illegal aliens are not receiving social security benefits. Opening up a checking account to receive social security benefits with a fake driver’s license or social security card for bank id is simplicity itself, although I imagine this would not occur often. This also ignores of course the welfare costs for illegal aliens. I see no way that illegal aliens are not a heavy net loss for the tax payer.

  13. A Guy:

    I guess that’s the reason two of the dying, dead-fish wrappers (the New York Times and Wash. Post-it) recently printed that unemployment is “liberating/uplifting.”

    The oligarchs running both the dem and rep parties want illegals legalized. The dems see them as millions of additonal, solid voters and the reps see cheap labor.

    It is no secret to anyone with eyes to see. The power that be see as acceptable collateral damage the unreported destructions of the American family and middle class.

  14. Don,
    In my experience Elaine is exactly right. Most employers of illegals withhold and remit taxes precisely because getting in trouble with the INS is a mild inconvenience compared to getting in trouble with the IRS. And in most cases the income tax withholding is largely refundable, but refund claims are never filed; and social security benefits cannot be and therefore are never claimed. Employers often know that the SSNs are phony, but they also know that the IRS doesn’t care as long as it gets the dough. All this is true even of maids and gardeners, who typically work for employers as opposed to directly for consumers. This is not to say that illegals don’t pose an expensive burden on an array of social services, or that we should be indifferent to laws and the policy challenges of assimilation, but the idea that illegals are avoiding taxes is much overstated. Although “off the grid” tax avoidance by illegals is hardly rare, its incidence is probably not all that different from the general population given comparable income levels.

  15. Your experience differs from mine Mike. Around Central Illinois I know more than a few employers who do not withhold wages even on legal Americans, attempting the old “independent contractor” scam. Now needless to say this does not normally involve large corporations since such shenanigans would end up costing them far more than they are worth. However, for many small businesses and shell corporations in central Illinois such tax evasion schemes are far from rare. In regard to homeowners who hire illegals, for example, to roof their house, I think withholding for taxes would be a rare bird indeed which is probably why such transactions are not uncommonly conducted in cash. (I tend to get called in when the homeowner is dissatisfied with the work and I explain that taking a judgment in such a case is as futile as the government expecting to get taxes from such a transaction.) Of course discussions like this are frustrating because we have no good estimates on the underground economy size. I think the two trillion dollar estimate is probably low but all estimates in this area are just guess work.

  16. “I can’t help but notice how the same people who want to raise minimum wage extol such things as volunteerism and unpaid internships. Personally, I think it is little more than State-sanctioned-high-school-required slave labor.”

    Exactly. Slave Labor. Volunteerism, commanded and demanded by the schools for graduation is slave labor. The virtue of charity must always be guided by man’s conscience and his means, not by the state. We are slowly sinking into the slave mentality. The danger is that by demeaning the virtue of charity and the JOY that is begotten by the charity, man will forget how to practice the virtue of charity and man may even forget he is a man, a man who loves his neighbor. This is already happening with the people demanding that the state take on the virtue of charity instead of they, themselves, as though only the state may dictate the virtues. Separation of church and state, the freedom of man’s body and man’s soul.

  17. Elaine Krewer: I was injured at work.There were twenty people at the lawyers’ office. The receptionist spoke Spanish. Of the twenty people, I was the only white, non-Mexican worker claiming benefits. Just thought I would add to the pot.

  18. I don’t doubt that there are still plenty of illegals working off the books. However, enough of them are actually paying into the Social Security system that it probably at least partially explains why the feds aren’t all that eager to halt illegal immigration. It’s a net gain for them but a net loss for state/local governments.

  19. I’m scratching my head. Those people say they could never deport all the illegals, but seem to think they can lock up all the 85,000,000 American gun owners.

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