Solving the Unemployment Problem
Unemployment is a problem for the unemployed workers, who suffer from the loss of income, as well as for society, due to the resulting loss of productivity. Fortunately, there is a very simple solution, namely, doing away with the minimum wage.
While there are a number of causes of temporary unemployment, persistent unemployment of those willing and able to work is the result of the minimum wage. To see why consider the following supply and demand diagram for labor.
Unemployment occurs when the supply of labor exceeds the demand. In a free market, this would cause the price of labor to be reduced to the point at which the supply is equal to the demand, thereby eliminating unemployment. However, with a minimum wage, which is normally above the free market price of labor, wages are prevented from dropping to the point where the supply of labor equals the demand, so the result is persistent unemployment. Thus, the way to eliminate persistent unemployment is by abolishing the minimum wage.
While eliminating the minimum wage would end the long-term unemployment of those willing and able to work, there would still be people temporarily not working due to transitioning between jobs. In some cases, those out of work might be required to move to another geographic area or retrain in order to obtain employment. However, such temporary unemployment is a concomitant of a dynamic economy and is not generally considered to be part of the unemployment problem.
Now, let’s consider the costs and benefits of the minimum wage and of raising it. If the minimum wage were to be increased, the only group that might benefit would be those whose wages were below the new minimum wage. However, even that is uncertain, since the employer may choose to terminate some of those workers in order to save labor costs.
Regarding the costs, there is the intangible cost of the loss of freedom resulting from the government putting constraints on the employer’s ability to set the wages that he (or she) pays his employees. If an employer has some employees who are currently working below the new minimum wage, he has a number of options, all of which have undesirable consequences. He may choose to reduce labor costs by decreasing the size of his workforce, either by terminating some of his employees or through attrition. If he chooses the former, those employees who lose their jobs would be adversely affected due to their loss of income. In either case, the result would be an increase in unemployment and possibly a reduction in productivity of the employer’s business due to the resulting decrease in the number of his workers.
Another option is for employers to raise the price of their goods and services. This would result in an increase in the cost of living and build pressure for further increases in the minimum wage.
Finally, those employers who choose to neither reduce their workforce nor raise the price of their goods and services would necessarily experience a reduction in their profits. In the case of publically traded companies, the investors would have a reduced rate of return on their investments.
Now, let’s address the arguments made by the proponents of the minimum wage and in particular, those who advocate raising it. One common claim is that a person is unable to live on the (current) minimum wage. If that were indeed true, nobody would be able to work at that minimum wage, so employers would be forced to raise the wages that they pay in order to attract a sufficient number of employees to fill their available positions. A further refutation of the claim that one cannot live on the minimum wage is that workers in other countries, such as China, are able to live on incomes far below our minimum wage. The free market assures that everyone is fairly compensated for their labor.
A different but related claim is that those working at minimum wage are able to survive only because they are subsidized by government-provided entitlements, such as Medicaid and Food Stamps (now SNAP), which places an unfair burden on the taxpayers. While I agree with the premise regarding an unfair burden being placed on the taxpayers, I take issue with the implied conclusion that we should, therefore, raise the minimum wage. I would address the problem by eliminating all entitlements. As I argue in my article Dealing With Entitlement Cost Escalation, it is unfair that the productive members of society should be forced to bear the burden of supporting the nonproductive individuals. Included in the entitlements to be done away with would be unemployment compensation, the elimination of which would have the added benefit of increasing the motivation of those out of work to take the available jobs.
Another factor contributing to the fact that wages in this country are above the free market cost of labor is the collective bargaining engaged in by labor unions. It’s true that labor unions have benefited workers by negotiating better working conditions for them, but even here, it could be argued that those same improvements in working conditions could have been obtained, albeit at a slower pace, by competition among companies for workers. However, the success of labor unions in negotiating their members’ wages to be in excess of the free market value of their labor has added costs to society in the ways described above resulting from minimum wage laws.
National labor unions, in particular, have an unfair advantage at the bargaining table because the companies in the affected industries are prohibited by the Sherman Antitrust Act from presenting a united front in negotiating the wages of the workers in those industries. It should be recognized that national labor unions are, in effect, labor cartels and exert monopolistic control over the cost of labor. While organized workers within a given company have bargaining power on par with the management of that company, national labor unions constitute labor monopolies and should, therefore, be prohibited by the Sherman Antitrust Act.