Friday, July 24, 2009

Bad day for unskilled workers

The minimum wage increases for the third straight year today, this time to $7.25. It has now risen 41% from the $5.15 level in effect on July 23, 2007.

What does this mean? The same thing it means when you raise the price of anything else arbitrarily: a decrease in demand. Unskilled labor has an intrinsic value, that value being whatever level businesses are willing to voluntarily pay before deciding that the cost outweighs the benefit, at which point they will no longer pay it.

Of course, those businesses that employ minimum wage workers will pay the new wage, that's not what I mean. What I mean is that they will not just raise their unskilled labor cost by 41% in two years.

What they will do is cut the number of minimum wage hours they pay at the new level. For some, this will mean eliminating minimum wage jobs. For others, this will mean cutting full time workers to part time, with the added benefit of cutting, uhh, benefits. Part timers can be employed without having to provide perks such as medical benefits, paid vacations and the like.

The key thing to understand is that you cannot just arbitrarily force unskilled workers to make more money by government fiat. If you could do so without negative consequences, why not raise the minimum wage to $20.00 and make them middle class? Or why not $100.00 and make them rich?

Because, of course, you would cut the number of minimum wage workers to near zero and zero, respectively. Wages are the mechanism by which scarce resources, in which case this unskilled labor, are allocated among competing consumers, in this case employers.

Any attempt to artificially overprice these resources can only result in increased supply and decreased demand of said resource. Since the resource in this case is unskilled labor, that is who will get hurt by this ham-fisted government intervention in the market.

But the good news is that politicians and elites in journalism and academia will get to pat themselves on the back for their compassion, no matter who gets hurt as a result.

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