Minimum Understanding of the Minimum Wage

From Thomas Sowell:

Political crusades for raising the minimum wage are back again. Advocates of minimum-wage laws often give themselves credit for being more “compassionate” towards “the poor.” But they seldom bother to check what are the actual consequences of such laws.

One of the simplest and most fundamental economic principles is that people tend to buy more of something when the price is lower and less when the price is higher. Yet advocates of minimum-wage laws seem to think that the government can raise the price of labor without reducing the amount of labor that will be hired.

When you turn from economic principles to hard facts, the case against minimum-wage laws is even stronger. Countries with minimum-wage laws almost invariably have higher rates of unemployment than countries without minimum-wage laws.

Most nations today have minimum-wage laws, but they have not always had them. Unemployment rates have been very much lower in places and times when there were no minimum-wage laws.

Switzerland is one of the few modern nations without a minimum-wage law. In 2003, The Economist magazine reported: “Switzerland’s unemployment neared a five-year high of 3.9 percent in February.” In February of this year, Switzerland’s unemployment rate was 3.1 percent. A recent issue of The Economist reported Switzerland’s unemployment rate as 2.1 percent.

Most Americans today have never seen unemployment rates that low. However, there was a time when there was no federal minimum-wage law in the United States. The last time was during the Coolidge administration, when the annual unemployment rate got as low as 1.8 percent. When Hong Kong was a British colony, it had no minimum-wage law. In 1991, its unemployment rate was under 2 percent.

As for being “compassionate” toward “the poor,” this assumes that there is some enduring class of Americans who are poor in some meaningful sense, and that there is something compassionate about reducing their chances of getting a job.

Most Americans living below the government-set poverty line have a washer and/or dryer, as well as a computer. More than 80 percent have air conditioning. More than 80 percent also have both a landline and a cell phone. Nearly all have television and a refrigerator. Most Americans living below the official poverty line also own a motor vehicle and have more living space than the average European — not Europeans in poverty, the average European.

Why then are they called “poor”? Because government bureaucrats create the official definition of poverty, and they do so in ways that provide a political rationale for the welfare state — and, not incidentally, for the bureaucrats’ own jobs.

Most people in the lower income brackets are not an enduring class. Most working people in the bottom 20 percent in income at a given time do not stay there over time. More of them end up in the top 20 percent than remain behind in the bottom 20 percent.

There is nothing mysterious about the fact that most people start off in entry-level jobs that pay much less than they will earn after they get some work experience. But when minimum-wage levels are set without regard to their initial productivity, young people are disproportionately unemployed — priced out of jobs.

In European welfare states where minimum wages, and mandated job benefits to be paid for by employers, are more generous than in the United States, unemployment rates for younger workers are often 20 percent or higher, even when there is no recession.

Unemployed young people lose not only the pay they could have earned but, at least equally important, the work experience that would enable them to earn higher rates of pay later on.

Minorities, like young people, can also be priced out of jobs. In the United States, the last year in which the black unemployment rate was lower than the white unemployment rate — 1930 — was also the last year when there was no federal minimum-wage law. Inflation in the 1940s raised the pay of even unskilled workers above the minimum wage set in 1938. Economically, it was the same as if there were no minimum-wage law by the late 1940s.

In 1948 the unemployment rate of black 16-year-old and 17-year-old males was 9.4 percent. This was a fraction of what it would become in even the most prosperous years from 1958 on, as the minimum wage was raised repeatedly to keep up with inflation.

Some “compassion” for “the poor”!

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The Special-Needs Economy

From James Taranto:

“Rep. Nancy Pelosi (D-Calif.) and House Democrats have dropped the word ‘stimulus’ from their vocabulary,” the Hill reports. The news comes on the eve of President Obama’s history-making speech before a joint session of Congress, in which, as Bloomberg’s Al Hunt reports, the president is expected to propose a $300 billion “jobs plan” that “follows the contours of his $830 billion 2009 economic [CENSORED] package.”

The Hill report adds that “the House minority leader and her caucus are still pushing an economic [CENSORED] agenda,” but because the 2009 whatchamacallit was a ruinously expensive failure, “they’ve radically changed their rhetoric.” Do the Nolabelists know about this?

“Democrats are now being careful to frame their job-creation agenda in language excluding references to any [CENSORED], even though their favored policies for ending the deepest recession since the Great Depression are largely the same,” the Hill adds:

The Democrats’ signature “Make it in America” platform aims to create jobs by increasing infrastructure spending, providing financial help to struggling states and expanding tax credits for businesses, all of which were key elements of their 2009 economic [CENSORED] bill.

Recognizing the unpopularity of the 2009 package, however, Democratic leaders have revised their message with less loaded language–“job creation” instead of “[CENSORED]” and “Make it in America” in lieu of “Recovery Act”–in hopes of tackling the jobs crisis.

Pelosi is working out on the “euphemism treadmill.” Cognitive scientist Steven Pinker described this metaphorical fitness machine in a 1994 Baltimore Sun op-ed: “People invent new ‘polite’ words to refer to emotionally laden or distasteful things, but the euphemism becomes tainted by association and the new one that must be found acquires its own negative connotations. ‘Water closet’ becomes ‘toilet’ (originally a term for any body care, as in ‘toilet kit’), which becomes ‘bathroom,’ which becomes ‘rest room,’ which becomes ‘lavatory.’ ”

Another example: “Idiot,” “imbecile” and “moron” are now insults, but they originated as clinical terms referring to various degrees of low intelligence. “Retarded” became the euphemism of choice until it too took on an insulting connotation. Now there’s actually a website, R-word.org, whose goal is “to eliminate the demeaning use of the R-word.” Meanwhile, the people to whom the R-word referred when it was a euphemism are said to have “special needs.”

Maybe Pelosi and Obama could take a cue from the R-worders and start a site called S-word.org to eliminate that hurtful $830 billion word. For that matter, why doesn’t Obama explain that the purpose of the $300 billion he’s going to ask Congress to blow is to help the economy with its special needs? The Republicans probably wouldn’t have a response to that!

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Talker-in-Chief

From James Taranto:

Lather, Rinse, Re-Elect

The Associated Press reports President Obama has figured out what to do about the unemployment problem, and you’re going to want to sit down before we tell you. Ready? OK, here goes:

He’s going to give a “major speech.”

Wait, there’s more! The Los Angeles Times reports that he’s already “daring Republicans to block” the “job-creation package” he has yet to devise. Yesterday’s Dilbert strip offered a preview, with Pointy-Haired Boss playing the role of Obama: “This is the best plan in the world, and anyone who disagrees is an ignorant nuisance.”

The AP adds that since Republicans are likely to oppose the yet-nonexistent proposals, Obama “is already preparing to lobby the American public for support. . . . That would set up an issue for his re-election campaign next year.”

So, to sum up: Give a big speech, demand that Congress do his bidding, implore Americans to lobby Congress. Lather, rinse, re-elect. What a fresh new style of leadership!

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Wage Gap

From Carrie Lukas:

Tuesday is Equal Pay Day—so dubbed by the National Committee for Pay Equity, which represents feminist groups including the National Organization for Women, Feminist Majority, the National Council of Women’s Organizations and others. The day falls on April 12 because, according to feminist logic, women have to work that far into a calendar year before they earn what men already earned the year before.

In years past, feminist leaders marked the occasion by rallying outside the U.S. Capitol to decry the pernicious wage gap and call for government action to address systematic discrimination against women. This year will be relatively quiet. Perhaps feminists feel awkward protesting a liberal-dominated government—or perhaps they know that the recent economic downturn has exposed as ridiculous their claims that our economy is ruled by a sexist patriarchy.

The unemployment rate is consistently higher among men than among women. The Bureau of Labor Statistics reports that 9.3% of men over the age of 16 are currently out of work. The figure for women is 8.3%. Unemployment fell for both sexes over the past year, but labor force participation (the percentage of working age people employed) also dropped. The participation rate fell more among men (to 70.4% today from 71.4% in March 2010) than women (to 58.3% from 58.8%). That means much of the improvement in unemployment numbers comes from discouraged workers—particularly male ones—giving up their job searches entirely.

Men have been hit harder by this recession because they tend to work in fields like construction, manufacturing and trucking, which are disproportionately affected by bad economic conditions. Women cluster in more insulated occupations, such as teaching, health care and service industries.

Yet if you can accept that the job choices of men and women lead to different unemployment rates, then you shouldn’t be surprised by other differences—like differences in average pay.

Feminist hand-wringing about the wage gap relies on the assumption that the differences in average earnings stem from discrimination. Thus the mantra that women make only 77% of what men earn for equal work. But even a cursory review of the data proves this assumption false.

The Department of Labor’s Time Use survey shows that full-time working women spend an average of 8.01 hours per day on the job, compared to 8.75 hours for full-time working men. One would expect that someone who works 9% more would also earn more. This one fact alone accounts for more than a third of the wage gap.

Choice of occupation also plays an important role in earnings. While feminists suggest that women are coerced into lower-paying job sectors, most women know that something else is often at work. Women gravitate toward jobs with fewer risks, more comfortable conditions, regular hours, more personal fulfillment and greater flexibility. Simply put, many women—not all, but enough to have a big impact on the statistics—are willing to trade higher pay for other desirable job characteristics.

Men, by contrast, often take on jobs that involve physical labor, outdoor work, overnight shifts and dangerous conditions (which is also why men suffer the overwhelming majority of injuries and deaths at the workplace). They put up with these unpleasant factors so that they can earn more.

Recent studies have shown that the wage gap shrinks—or even reverses—when relevant factors are taken into account and comparisons are made between men and women in similar circumstances. In a 2010 study of single, childless urban workers between the ages of 22 and 30, the research firm Reach Advisors found that women earned an average of 8% more than their male counterparts. Given that women are outpacing men in educational attainment, and that our economy is increasingly geared toward knowledge-based jobs, it makes sense that women’s earnings are going up compared to men’s.

Should we celebrate the closing of the wage gap? Certainly it’s good news that women are increasingly productive workers, but women whose husbands and sons are out of work or under-employed are likely to have a different perspective. After all, many American women wish they could work less, and that they weren’t the primary earners for their families.

Few Americans see the economy as a battle between the sexes. They want opportunity to abound so that men and women can find satisfying work situations that meet their unique needs. That—not a day dedicated to manufactured feminist grievances—would be something to celebrate.

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The Democrats’ unmistakable message

From Michael P. Fleischer:

With unemployment just under 10% and companies sitting on their cash, you would think that sooner or later job growth would take off. I think it’s going to be later—much later. Here’s why.

Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She’s been with us for over 15 years. She’s a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.

Before that money hits her bank, it is reduced by the $2,376 she pays as her share of the medical and dental insurance that my company provides. And then the government takes its due. She pays $126 for state unemployment insurance, $149 for disability insurance and $856 for Medicare. That’s the small stuff. New Jersey takes $1,893 in income taxes. The federal government gets $3,661 for Social Security and another $6,250 for income tax withholding. The roughly $13,000 taken from her by various government entities means that some 22% of her gross pay goes to Washington or Trenton. She’s lucky she doesn’t live in New York City, where the toll would be even higher.

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest—$9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.

Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers’ comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally’s Medicare and $3,661 for her Social Security.

When you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest—$9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.

Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers’ comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally’s Medicare and $3,661 for her Social Security.

When you add it all up, it costs $74,000 to put $44,000 in Sally’s pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally’s job each year.

[…]

To offset tax increases and steepening rises in health-insurance premiums, my company needs sustainably higher profits and sales—something unlikely in this “summer of recovery.” We can’t pass the additional costs onto our customers, because the market is too tight and we’d lose sales. Only governments can raise prices repeatedly and pretend there will be no consequences.

And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive. As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.

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Uncertainty

From Thomas Sowell:

If you could spend vast amounts of other people’s money just by saying a few magic words, wouldn’t you be tempted to do it? Barack Obama has spent hundreds of billions of dollars of the taxpayers’ money just by using the magic words “stimulus” and “jobs.”

It doesn’t matter politically that the stimulus is not actually stimulating and that the unemployment rate remains up near double-digit levels, despite all the spending and all the rhetoric about jobs. And of course nothing negative will ever matter to those who are part of the Obama cult, including many in the media.

But, for the rest of us, there is a lot to think about in the economic disaster that we are in.

Not only has all the runaway spending and rapid escalation of the deficit to record levels failed to make any real headway in reducing unemployment, but all this money pumped into the economy has also failed to produce inflation. The latter is a good thing in itself, but its implications are sobering.

How can you pour trillions of dollars into the economy and not even see the price level go up significantly? Economists have long known that it is not just the amount of money, but also the speed with which it circulates, that affects the price level.

Last year, the Wall Street Journal reported that the velocity of circulation of money in the American economy had plummeted to its lowest level in half a century. Money that people don’t spend does not cause inflation. It also does not stimulate the economy.

The current issue of Bloomberg BusinessWeek has a feature article about businesses that are just holding onto huge sums of money. They say, for example, that the pharmaceutical company Pfizer is holding on to $26 billion. If so, there should not be any great mystery as to why Pfizer doesn’t invest it.

With the Obama administration being on an anti-business kick, boasting of putting its foot on some business’s neck, and the president talking about putting his foot on another part of the anatomy — and with Congress coming up with more and more red tape, more mandates, and more heavy-handed interventions in businesses — would you risk $26 billion that you might not even be able to get back, much less make any money on the deal?

Pfizer is not unique. Banks have cut back on lending, despite all the billions of dollars that were dumped into them in the name of “stimulus.” Consumers have also cut back on spending.

For the first time, more gold is being bought as an investment to be held as a hedge against a currently non-existent inflation than is being bought by the makers of jewelry. There may not be any inflation now, but eventually that money is going to start moving, and so will the price level.

Despite a big decline in the amount of gold used to make jewelry, the demand for gold as an investment has risen so steeply as to more than make up for the reduced demand for gold jewelry, and has in fact pushed the price of gold to record high levels.

What does all this say? That businesses don’t know what to expect next from this administration, which seldom lets a month go by without some new anti-business law, policy, or rhetoric.

When you hire people in this environment, you know what you have agreed to pay them and what additional costs there may be for their health insurance or other benefits. But you have no way of knowing what additional costs the politicians in Washington are going to impose, when they are constantly coming up with new, bright ideas for imposing more mandates on business.

One of the little-noticed signs of what is going on has been the increase in the employment of temporary workers. Businesses have been increasingly meeting their need for labor by hiring temporary workers and working their existing employees overtime, instead of hiring new people.

Why? Because temporary workers usually don’t get health insurance or other benefits, and working existing employees overtime doesn’t add to the cost of their benefits.

There is no free lunch — and the biggest price of all is paid by people who are unemployed because politicians cannot leave the economy alone to recover, as the American economy has repeatedly recovered faster when left alone than when politicians decided that they have to “do something.”

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