A Basic Principle about the Minimum Wage

Jacob G. Hornberger – December 13, 2017

A state-mandated minimum wage causes unemployment. It’s just a basic principle of economics. In fact, the minimum wage is why there is a chronic unemployment rate among African American teenagers of around 30-40 percent. If the minimum wage is repealed, that unemployment rate drops close to 0 percent.

Employers aim to make a profit. When they hire workers, they subjectively place a value on their labor. If they believe that the labor from the worker is more valuable than the money they are paying him, they’ll hire him. If they don’t, they won’t.

Let’s assume that an African American teenager asks for a job from an employer. The employer immediately places a subjective value on the teenager’s labor. He thinks: This person has no work skills (no work history), a bad education (public schooling), and he doesn’t dress well (extreme poverty).

Let’s say that a middle-class white teenager asks for a job from this same employer at the very same time. Good work skills, good education, and well-dressed.

Which one is the employer going to hire?

The employer says to the African American kid, “Sorry, I can only hire one person and the other guy is better qualified.”

The African American kid says, “How much are you paying him?”

The employer responds, “$7.25 per hour.”

The African American kid: “I’ll do the work for $2.00 per hour.”

That gets the employer’s attention. Suddenly everything changes for him. While it wasn’t worth it to him to hire the African American kid at $7.25, it’s entirely worth it to him to hire him at $2. Hiring him at $2 makes the kid profitable.

Enter the minimum wage. The white kid pipes up and says, “You can’t hire him at $2 an hour. That’s illegal under the minimum wage. You have to hire him for $7.25 or not hire him at all.”

The employer calls his lawyer and asks his opinion. His lawyer says, “If you hire the black kid at $2 and the state finds out about it, they will come crashing down on you with fines and sanctions so high you’ll wish you had never done it.

The white kid gets the job. The supporters of the minimum wage celebrate the fact that the black kid wasn’t “exploited,” blocking out of their minds that the state’s minimum-wage law has locked him out of the labor market, relegating him to making money another way, like in the drug trade.

This article was originally published at FFF.org. Jacob G. Hornberger is founder and president of The Future of Freedom Foundation.

 

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