Every time governments increase the mandatory minimum wage, union members rejoice. Through various tactics, unions enjoy higher wages and less competition from non-unionized workers.
Those with no lobbying power to stop it are the inevitable losers: poor people who get priced out of the workforce and small businesses that must deal with more expensive labor costs.
But that is not what one hears on the media, since organized unions and activist groups have the resources to put on protests and get most of the airtime. A new report, Against the Minimum Wage, written by Matthew Lau and released by the Frontier Centre for Public Policy, is a timely effort to counter 10 common fallacies that go unnoticed in political discourse.
In Canada, the provincial governments of Ontario, Alberta, and British Columbia are set to increase the minimum wage to CAN$15 (US$11.53) over the coming months and years. In his report, Lau assesses previous research both for and against the policy, and examines each province to offer the likely consequences.
None of his findings support enacting the minimum-wage increase, since the policy does not guarantee the touted reduction of income inequality and labor discrimination. When the minimum wage increases, the disemployment effect observed by most reputable studies targets low-skilled workers, since the small businesses that usually employ them can’t always afford higher wages.
Therefore, while unionized groups may benefit from higher incomes—although sometimes at the expense of fringe benefits—a significant number of workers can lose their jobs or never get hired in the first place. The surveyed research show that these effects are even worse for teenagers, young adults, immigrants, and racial minorities.
For instance, before the American minimum-wage law, enacted in 1956, the teenage unemployment rate was around 10 percent. After introducing the law, the unemployment rate of white teenagers raised to 14 percent and that of black teenagers skyrocketed to 24 percent.
Since a higher minimum wage reduces the job opportunities for low-skilled applicants, the bargaining power of these workers also decreases. Fewer employers want to hire them, so they are unable to demand better working conditions. The artificially high price creates a surplus of low-skilled workers, and businesses do not need to compete for them.
However, mom-and-pop businesses are also placed in a tight spot, and those that cannot afford the hike will either reduce their payroll or shut down. This means fewer job opportunities for low-skilled workers, but also fewer options for consumers—generally, cheap and convenient ones. Consequently, the plight of the poor worsens.
In brief, unions and politicians ally against non-unionized, poor families. Some unions even exempt themselves from minimum-wage hikes, admitting it’s bad policy. The irony of arguments invoking “social justice” only adds insult to injury.
Pressure groups claim that businesses and employers always maximize profits at the expense of workers. This is nonetheless a fallacy, since—barring government privileges—no firm can sustainably make money without increasing productivity, which requires well-paid employees.
But if labor costs exceed a firm’s marginal returns, the most reasonable course of action is to let workers go. Governments constraining the operations of businesses and altering the dynamics of the labor and consumer markets only exacerbate this challenge.
Bureaucrats, no matter how well intentioned, cannot foresee what the best economic path is. Every worker and every business manager has his own needs, realities, and expectations. In the end, policies implemented to protect workers are double-edged swords (read Economics in One Lesson). Higher minimum wages benefit a small group of workers who are lucky enough to keep their jobs at well-off firms, and union members with political connections.
Fortunately, this policy appears to be losing support in some regions. Michigan just became the fifth US state to repeal the prevailing wage law for public-construction workers after approving a legislator call on June 6, 2018. This decision will also save taxpayer money.
If minimum wage cannot be repealed, Lau suggests freezing it to avoid more harm to unskilled workers and the broader economy. As quoted in the report, Milton Friedman asserted 62 years ago that minimum-wage legislation is “about as clear a case as one could hope to find of a measure whose effects are precisely the opposite of those intended by the men of good will who support it.”