Minimum Wage

In my last post I made the point that illegal immigrants are doing jobs that politicians have made illegal by the institution of the minimum wage. If there was no minimum wage then illegal immigrants would have to compete with Americans for those jobs that pay less than the minimum wage.

The minimum wage is just one example of where politicians willfully disregard the laws of economics to buy votes. Sure, their motivations are couched in terms such as "we should help those who are less fortunate," or "you can't support a family on so little income," etc. But none of those motivations can undo simple economic realities.

As mentioned earlier, prices are a result of something, not the cause - meaning, they react to market realities, they don't create them. Wages are no different. Wages are a price - the price of a person's labor. Each person has a product that they sell - that product being their energy, skill, time, and attitude - which we roughly call: labor. That product, like every other product on the market has a price that is determined by market conditions affecting supply and demand.

I'm a pilot. I fly charter business jets. My labor has a market price. It's a good job and I enjoy it. I make fairly good money, but not great, and I would like to make more. It's possible that I could find another job that pays a little more, but it's unlikely to be significantly different. Why? Because market conditions are such that the companies who need pilots with my ratings, skills, and experience are able to acquire the pilots they need at the wages that are currently being paid. If more airplanes are added to the corporate fleets across America and demand for pilots like me goes up, I'll be able to force my boss to compete with other companies needing my services. He'll either have to pay me more, or lose me and have to hire another pilot at the new higher wage. Either way, as demand goes up for pilots, wages will go up. The opposite is true if demand decreases, such as after 9/11 when many pilots were unemployed and willing to work for peanuts.

If a corporate pilot lobby was powerful enough, maybe they could convince congress to pass a pilot minimum wage. (I know, it's a silly idea, but I'm making a point here) Let's say it was $100,000 a year. I suspect most pilots who make less than that would be all in favor. Lots of pilots make around $20,000 a year. That's because they are inexperienced and using their cheap price tag to build experience. As they gain experience, they'll be able to earn more. But, if that minimum wage is enacted, employers won't suddenly have the finances to increase each pilot's pay by $80,000. They'll have to find other options. Maybe raise the pay on one of their pilots and lay off others. Maybe get rid of their airplanes and start using trucks. Unfortunately, this act by congress would drive up the costs of doing business while forcing the business owner to find less attractive means to accomplish his work - plus, many new pilots wouldn't be able to gain the experience they need to reach those higher paying jobs.

While this analogy may be a stretch - raising the minimum wage has the same effect regardless of the skills or wage levels. It always forces employers to restructure the way they do business to their disadvantage and makes it harder for workers to get entry level jobs.

Try looking at it another way - prices are the market's way of eliminating surpluses and shortages by finding a point of equilibrium between supply and demand. When price (remember, normally a result of market conditions) is artificially forced out of its place by governmental tampering, the equilibrium between supply and demand is lost. The result will always be surpluses or shortages depending upon which direction the price was manipulated. Force a price up, as in the case of minimum wage, and there will be surpluses of labor. Force a price down, as in rent controls, and there will be shortages of places to live.

Minimum wage hikes are really about vote buying at the expense of the low wage employee, the business owner, and the consumer. All three get hurt so the politician can get votes. The low wage employee finds it harder to find entry level positions and hence gain experience. The business owner finds it harder to find labor for low value work. The consumer has to pay higher prices. Personally, I'd rather see the politician get hurt and see the others freely engage in market activities to mutual benefit.

While we may not like the price we pay for things we need - we shouldn't complain about the price. If you have to complain (which I don't recommend), complain about things that can affect price - such as the factors that affect supply and demand. Please, please, please - don't call your congressman and ask him to do something about the price. If he thinks you'll vote for him, he'll do something alright, but it won't help. He can't do anything about the price. He can only hurt the business owner, the employee, and drive up costs - which ultimately drives up prices to the consumer.

For the most part, the only good your government official can do is get out of the way. America was not built on governmental involvement. It was built on American ingenuity as it tackled the problems we commonly faced. Government has a role, but it can do no good by trying to force a business owner to lower his prices or increase wages. The market will very effectively determine these levels and we should just get out of the way and let it happen.

1 comment:

James said...

Developers will naturally building for the high-end of the market to maximize their profits.

In Canada there has always been a shortage of affordable housing that has been documented going back a century.

In that country there was a boom in the construction of rental housing from the 50's to 1972 because of huge tax concessions both at the federal and their provincial governments but all were cancelled in 1972 and construction of rental housing plummeted quickly, and this was years before any province brought in rental rate regulations.

There are many forms of rental regulations which all get labelled as rent controls so one needs to get specific about what law they are talking about when they discuss so-called rent control laws.