Maximum Unemployment Through Minimum Wage (By Walter Sweeney)

I wrote this last year for a class that I was taking at the time.  I hope that you find it informative and interesting.  Enjoy!


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Minimum wage; its morality, its effect on the employment rates and its effect on the economy as a whole has always been a controversial issue since Franklin D. Roosevelt’s “New Deal” program. The idea is that if employers pay a certain minimum amount to an employee in wages then the overall quality of life and economic stability of the country will increase. Many argue that minimum wage is just a set basic starting rate of income for new employees. Is that really how it works, though? Historically, there are many examples of the effects of minimum wage and there are more than a handful of modern statistics and cases that show how minimum wage effects the world we live in today. It has been proven that the opposite of minimum price laws (i.e. minimum wage) are not healthy for the economy. This has been shown through rent control and other such maximum price limits. Is it possible that minimum wage could be healthy? In retrospect it has been proven otherwise. Employers base the amount of money they will pay someone on the productivity they have witnessed by said employee. By setting a minimum wage the government requires employers to pay a certain hourly-based rate to their employees, regardless of their productivity level. Minimum wage should be abolished since it has been proven to be a serious contributing factor of high(er) unemployment -- which in turn hurts the economy -- because no employer is willing to pay someone for more work that could otherwise require less compensation.




In 1938, during the Great Depression, the United States Congress passed the Federal Labor Standards Act (FSLA). The act set the limit for the first ever minimum wage level in America protecting workers from borderline “inhumane” paychecks. Worker’s unions fought for the cause under the assumption that they would soon fall victim to further financial gaps between their paychecks and that of their employers, or at least that is what the unions who lobbied for it despite the fact that a union with members who receive minimum wage are rare, assuming such a union actually exists. “The FLSA introduced sweeping regulations to protect American workers from being exploited, and created a mandatory federal minimum wage of 25 cents an hour in order to maintain a minimum standard of living necessary for health, efficiency and general well-being, without substantially curtailing employment” (minimum-wage.org). Since the FSLA was passed in 1938 congress has amended it multiple times, always increasing the minimum wage to eventually reach the current federal minimum wage of $7.25 per-hour. There have been many studies concerning the effects of minimum wage over the 73 years it has existed. Most of the studies have shown, beyond any shadow of doubt, that when minimum wage is increased, there is a decrease in employment on an average of 10% increase causes 1% more unemployment (uva.edu). The reason the increase in unemployment is directly related to an increase in minimum wage is because every employer evaluates the productivity level of each of his or her employees in terms dollar per hours. If an employee is less productive than set the minimum wage, then there is no reason for that employer to keep that less productive employee on the pay roll. Additionally, requiring employers to pay a certain higher amount to their employees in wages, the profit margin for that business will decrease unless some workers are let go.



In the modern era of minimum wage, it is the unskilled laborers who suffer the most at the hands of minimum wage laws. Because of their over-representation on the lower end of the labor marker, it is adolescents and minorities who are the most negatively effected by minimum wage laws. This is ironic since that is the demographic that the FSLA is meant to assist. Some theorize that raising the minimum wage compels high school students to drop out of high school in order to take advantage of the newly increased wages, but if this were to happen, then those adolescents (unskilled labor) would be hard pressed to find a job since there are fewer jobs available (Hamrock, Caitlin, and Warren 1). Furthermore, in 1983, the US House of Representatives commissioned a study in which they discovered that minimum wage increases reduce the average earnings of teenaged workers. That is to say that if you look at a sampling of 20 adolescent workers who are each receiving $5/hr (average of $100/hr) but then 4 of them loose their jobs as a result of minimum wage of $2/hr, the overall average of the wages paid to those workers will decrease (new average of $90/hr). In the case of minorities, Ken Kersch writes, “The 1938 Fair Labor Standards Act, which set a national minimum wage, might have played a significant role in the development of a black underclass” (gmu.edu). In August of 2011 there was a study that showed that, “Overall U.S. unemployment is 9.1 percent. For white adults, it's 8 percent, and for white teens, 23 percent. Black adult unemployment stands at 17 percent, and for black teens, it's 40 percent, more than 50 percent in some cities” (Williams). Again, this is an over-representation of this demographic as the teenaged African American community is far less than 40-50% of the overall workforce in this country.



While minimum wage laws are a form of minimum price control, there is such thing as a maximum price control. Rent control is a excellent example of this. Where minimum price controls create a surplus people looking for work, maximum price control causes a shortage of available housing. The graphs bellow (figure 1) demonstrates this phenomenon. At the intersection of the supply and demand curve is the equilibrium price for the respective economic goods of employees and housing. At that price, the market is cleared…anyone who wants a job has one and anyone who wants a house has one.

(Figure 1)



When the price of a good like employees or housing is artificially modified by an outside source like the government, there is either too much or too little of that good at the previous/equilibrium market price. What does this mean for unemployment? The surplus that is shown above the intersection of the supply and demand curves represents all those workers who are seeking employment, but cannot find it…there are more of them seeking work than there was previously. Whenever prices are altered, these shortages and surpluses occur, and they are always negative for the economy as a whole as the economy relies on equilibrium prices in order to remain stable and healthy.



There are those that argue in favor of maintaining minimum wages and, if at all possible, raising them even higher. The common argument is that it is worth the trade off of higher unemployment (particularly among teenagers and minorities) for overall higher wages for those who are employed. “Labor activists and liberals have actively pushed for a higher minimum wage, claiming that the minimum wage must also serve as an adequate living wage for all workers. The current minimum wage rate, they claim, is much too low to serve as a living wage in today's economy” (minimum-wage.org). Others will argue that the minimum wage is just a launching point and that workers will advance past the bare minimum quickly and it is only “fair” that everyone starts at the same place. Andrew Lustig writes that since the wage would increase for everyone (both employer and employee), no one will be adversely affected by minimum wages, since the cost of consumer goods raises relative to the price to employ workers and the workers get paid more so no one gets hurt (1).



The idea that minimum wage should behave as a base level “living wage” for all of American workers (minimum-wage.org) is a conclusion that has been come to with less than all the facts. Either that or it is the result of political posturing. In a June 1996 publication, Kevin Kelly points out that much of the minimum wage debate is nothing more than an “unfortunate side show” that serves the purpose of distracting from “far more substantive economic issues” (1). Kelly goes on to say that, “when you increase wages, employers will find some way to reduce the impact on their profits by getting rid of some workers” (1). Not only does Kelly show that increasing unemployment is inevitable when minimum wage is raised, but he also sites information from a Federal Reserve Board study which estimated that, in 1996, “a ninety-cent increase [in minimum wage] would reduce overall employment by 400,000 jobs, and that about half of those who lost their jobs would not find new [jobs]” (1). The assumption that minimum wage is merely a “starting point” for a new workers has also been disproven. In 2000 a Senior Economist with the Center for Economic and Policy Research in Washington, DC published a paper documenting that a “significant number of new workers stay at or near the minimum wage long after their initial foray into the labor market” (Schmidt 1). The actual data shows after a decade or more in the working world nearly 20% of employees who started off at minimum wage will spend more than half of their overall career within $1.50 of minimum wage (Schmitt 1). This study stood the pro-minimum wage activists on their head, as it totally invalidated their claims that minimum wage acts as an even starting point for first-time employees.



Not only do minimum wage laws hurt the individuals that they are meant to economically stimulate, but they also damage the economy as a whole by causing a surplus of job seeking workers in the labor market. Despite all the data that as proven the economic turbulence caused by minimum wage, we still live in a country that clings to the idea that maybe someday all of the economic theory and data that stands against minimum wage will miraculously change someday. Most shocking of all is not the data that disproves the benefits of minimum wage, but it is instead the 1935 Supreme Court decision (Poultry vs. US Government) that ruled minimum wage unconstitutional. In 1937 this decision was later reversed in the West Coast Hotel vs. Perish decision. Prior to this second decision, President Roosevelt (a staunch supporter of the FLSA and minimum wage) threatened to add judges to the Supreme Court, increasing the total number of judges on the high court by six, making it a total of 15. After reversing the 1935 decision, Justice Owen Roberts was heard to say, “a switch in time saves nine,” an expression of how it was better to allow this one unconstitutional law to pass than to allow FDR to be able to essentially control the Supreme Court with the appointment of so many new judges. One year later the FLSA was passed and the estimate that 30-50,000 people would be unemployed as a result was far surpassed. In Texas alone 40,000 people lost their jobs and the lines at unemployment offices across the country increased by a total of 3 million people.


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Works Cited



“History of the United States’ Minimum Wage.” minimum-wage.org/history.asp. Minimum-Wage.org, 2009-2001. Web.


“Effects of Increases in the Minimum Wage.” uvm.edu/~vlrs/doc/min_wage.htm. University of Vermont, 1991-2001. Web.


Hamrock, Caitlin, and John Robert Warren. "The effect of minimum wage rates on high school completion." Social Forces 88.3 (2010): 1379+. Gale Opposing Viewpoints In Context. Web.


Kersch, Ken. “Blacks and Labor – The Untold Story.” mason.gmu.edu/~dbernste/publicinterest.html. Public Interest, 2002. Web.


Figure 1: Deborah Ma. Supply and Demand Graph. 2011. University of British Colombia, Canada. UMBCwiki. Web.


Williams, Walter. “Why Minimum Wage Keeps Blacks Jobless.” Washingtonexaminer.com. Washington Examiner, 31 AUG 2011. Web.


Schmitt, John. "Minimum Wage Careers." The American Prospect 11.10 (2000): 8. Gale Opposing Viewpoints In Context. Web.


Lustig, Andrew. "Bare minimum: what constitutes a just wage?" Commonweal 133.3 (2006): 7+. Gale Opposing Viewpoints In Context. Web.


Kelly, Kevin. "A minimal gesture: the politics of wage hikes." Commonweal 123.11 (1996): 8+. Gale Opposing Viewpoints In Context. Web.


Gorman, Linda. “Minimum Wages.” Econlib.org/library/enc/minimumwages.html. Library of Economics and Liberty, n.d. Web.