Lee Friday – July 19, 2017
Most people are economically illiterate because basic economic principles are poorly taught in government schools. Thus, the general public is easily bamboozled by the same government, as it promotes policies which are politically popular, but socially and economically harmful.
The minimum wage in Ontario is $11.40/hour. It will rise to $11.60 in October. Kathleen Wynne’s Ontario Liberal Government is ordering a further increase to $14.00 in January, 2018, and another increase to $15.00 in 2019.
Politicians love to increase the minimum wage because workers outnumber employers by a significant margin, which means it is an easy way to buy votes, regardless the consequences.
Employers are not treating workers fairly! Living standards are too low! We must help these poor workers! We must reduce poverty! We must give workers more protection! This is the typical propaganda offered by politicians and bureaucrats as they attempt to justify the minimum wage. They insist their policies are supported by various economists, who in turn insist their support is completely impartial, based on hard evidence and numerous studies. How many voters actually look at these studies and examine the evidence?
The fact is that most economists do not support the minimum wage. However, those that do support it often claim that many other economists agree with them. In his 1993 book, Economics, Joseph Stiglitz denounced the minimum wage. But his views
quickly changed when he got a new job as Chief Economic Adviser (CEA) for the Clinton administration. Stiglitz and the rest of Clinton’s economic advisers suddenly signed up as supporters of the minimum wage. How does a person go from writing a textbook denouncing minimum wage to outright support of a policy? Politics. . . . Clinton defended raising the minimum wage by saying that his CEA supported it.
Most economists agree a legally mandated minimum wage reduces employment, particularly for unskilled young people with little work experience. Example – an employer estimates an inexperienced unskilled worker will add value to the company equal to $8.00 per hour. The employer is willing to hire this person at a rate lower than $8.00, but if the government mandated minimum wage is $8.00 or higher, the person will not be hired. Thus, such applicants are unable to accept jobs which pay wages commensurate with the value they offer an employer. In this way, the government discriminates against inexperienced unskilled workers by ‘legally’ denying them the opportunity to gain experience and develop skills which would enhance their future economic prospects.
Many companies would love to hire more young people, and many young people would gladly work for less than minimum wage, if they had the freedom to do so. This would improve their self-esteem and provide them with valuable job experience. But if employers must pay minimum wage, they will often choose to hire an older, more experienced worker, who is more productive only when compared to a younger, less experienced worker at the same wage. Then we complain about teenagers having too much time on their hands. Why aren’t more of them working, we ask. Now you know.
‘MINIMUM WAGE’ CAUSES UNEMPLOYMENT
Speaking about the pending increase to Ontario’s minimum wage, Gerry Macartney, head of the London Chamber of Commerce, said, :
“This is very careless and reckless legislation,”
Macartney warned the fallout could include companies hiring fewer workers, scaling back employee hours and raising prices.
“This is going to wreak havoc on small businesses in Ontario,” he said.
“They’re either going to be laying people off, firing people, closing their businesses, not hiring any new employees, certainly not hiring any students.”
Macartney is correct. Many studies have shown that a legally mandated minimum wage leads to higher unemployment. However, each side of the minimum wage debate questions the legitimacy of the studies conducted by the other side. So, let’s forget all the studies for a moment, and use our heads i.e. let’s think this through logically, using some basic, self evident, economic principles.
Employees wish to be paid a million dollars per hour, while an employer wishes to pay them one cent per hour. Obviously, nobody will have their wish granted because all wishes are unreasonable, and they all know this. The employer knows he cannot hire workers at one cent per hour, because his competitors will offer higher paying alternatives. Conversely, job applicants do not ask to be paid a million dollars per hour, because they know other applicants will offer themselves as lower paid alternatives. Thus, when we take the time to think about it, it becomes clear that a rate of pay is established through a bidding process in the marketplace, subject to the natural economic forces of supply and demand.
The goal of an employer is to maximize profits. Therefore, an employer will not voluntarily increase the rate of pay for one or more workers unless this serves his goal. If an employer is currently maximizing his profits, and he is then forced to increase the rate of pay to workers, this in turn forces him to reassess his options so that he may once again return to a position of maximum profitability. Under this scenario, the response from each such employer may be different – because the precise circumstances faced by each company, and within each industry, may also be different.
When an employer is faced with the unpleasant prospect of a minimum wage which will increase its labour costs, we must remember that the company’s goal is to maximize profits. Accordingly, we should not be surprised when numerous companies respond in one or more of the following ways: (a) firing some workers, (b) hiring fewer workers, (c) automating various tasks, (d) raising prices for their products. And some companies are forced into bankruptcy.
Logically therefore, it is easy to see how the minimum wage increases unemployment. Furthermore, with these various, unavoidable effects of the minimum wage, it is highly questionable whether a higher standard of living is experienced by the workers who think they are benefitting from the minimum wage. These so-called beneficiaries lose their benefits in two ways. First, as consumers, they must pay the higher prices which many companies are now charging. Second, higher unemployment reduces economic output (production), which means fewer product choices for consumers.
ECONOMIC IGNORANCE (OR INTENTIONAL DECEIT?)
One of the most economically ignorant justifications for the minimum wage is that even if it increases unemployment – which it most certainly does – it is still beneficial because most people who do not lose their jobs will spend most of their increased earnings, and that is good for the economy. Ontario Labour Minister Kevin Flynn said:
there is evidence a higher minimum wage can benefit economies and lead to job growth.
“This (is) money that goes to bread, it goes to diapers, it goes to bus fares, it goes to rent,” he said. “This is money that gets spent and invested right back in the community.”
Lars Osberg, an economics professor at Dalhousie University, said:
studies show that increasing the minimum wage increases people’s purchasing power, as well as consumption and economic activity in general.
Domestic consumption drives the economy, in Canada and around the world. . . . When lower income households see a sustained rise in incomes, they spend virtually all of it. . . . Almost all of this spending stays in the local economy. So boost the minimum wage and you boost the economy from the bottom up.
While some workers may lose their job after the minimum wage increase . . . a very large number of workers will see an important pay hike, and that will loop back into the economy. Increased consumer spending will grow the top line of businesses, and increase the need for more workers to meet the higher demand for goods and services . . .
We can sum up the comments of Flynn, Osberg, and Yalnizyan with four words. “Spending helps the economy.” If this is true, then even more spending will help the economy even more. So, what are we waiting for? If politicians are really concerned for our welfare, they should forget about a $15/hour minimum wage. Instead, they should force employers to pay a minimum wage of $1,000/hour. OMG, the economy would grow so fast it would make your head spin. Most people can see the absurdity of this suggestion. However, a $1,000/hour minimum wage is NOT absurd if it is true that spending helps the economy!
The truth is that spending does not help the economy. Production, not spending, is the key to a healthy economy. Furthermore, it is important to remember that investment in new production must come from our savings, which entrepreneurs borrow. But Armine Yalnizyan seems to deplore savings when she writes:
When higher income households see wage gains, some of it goes to savings. Additional consumption also often flows to vacations and luxury goods, often imported. In other words, a non-trivial part leaks out of the local economy.
Ridiculous on both counts, but I want to focus on savings. How can savings represent leakage out of the economy? Savings are available for entrepreneurs to borrow and invest in new production, thus creating new jobs. This is an important part of the economy Armine! In fact, it is a prerequisite for a healthy, sustainable, growing, economy.
People will always spend. They do not need encouragement to do so. People must spend in order to survive. But one cannot spend if there is nothing available to buy. Goods must first be produced before someone can purchase them. Production must precede consumption. As long as producers make things consumers want, spending will always follow. Thus, it is savings, not spending, which helps the economy, for without savings there can be no production, and hence no spending.
Recall Yalnizyan’s words (above): “Increased consumer spending will grow the top line of businesses, and increase the need for more workers to meet the higher demand for goods and services . . .” Nonsense. Yalnizyan neglects to mention that the growth in the top line of businesses is offset by their increased costs from the higher minimum wage. The “higher demand” does not come from higher wages because of higher productivity, which would generate higher business profits, which may prompt businesses to hire more workers. In fact, the “higher demand” Yalnizyan speaks of is not higher demand at all. Businesses incur higher expenses because of the minimum wage, then receive higher revenue when those extra wages are spent. If we take these offsetting amounts of money out of the equation, the truth is revealed – businesses have simply been forced by the government to hand over to workers a portion of their products. Therefore, contrary to what Yalnizyan would have us believe, a higher minimum wage will not “increase the need for more workers to meet the higher demand” – because the higher demand is an illusion.
Decisions have consequences. Every action produces one or more reactions. If you wish to read more about the negative consequences of a legally mandated minimum wage, see here, here, here, here, here, here, here, here, and here.
Politicians and bureaucrats insist that a legally mandated minimum wage is socially and economically beneficial. If they are so confident about these beneficial effects, let them set up their own companies, with their own money, and test their ideas in the marketplace. They can use their own money to outbid other employers for labour resources. According to their theory, substantial economic benefits would be easily achieved, regardless of the wages paid by other employers. Their success would surely encourage other companies to voluntarily follow suit, no coercion required. But politicians and bureaucrats do not do this.
Instead, they are politicians and bureaucrats. It is easy to give orders when you don’t have to personally bear the consequences of those orders.
Consider the morality, or immorality, of minimum wage laws. When the law forbids employers from paying anyone less than $ X/hour, this means the law is also forbidding individuals from selling their labour for less than $ X/hour. Think about it. An employer and potential employee can arrive at a mutually acceptable agreement. Then, a third party with no skin in the game – the government – forcibly intervenes and forbids the first two parties from making a voluntary agreement. This is unacceptable. Decisions must remain in the hands of those affected by the decisions.