The Unseen Costs of the Minimum Wage

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Murray Rothbard perhaps said it best when he argued that the minimum wage “is compulsory unemployment, period … the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.”

By Josh Grossman @ Ludwig Von Mises Institute

A recent article at US News and World Report by Pat Garofalo quotes Associated Press writer Christopher Rugaber who says that “US states that boosted their minimums at the beginning of the year, the number of jobs grew an average of 0.85 percent from January through June. The average for the other 37 states was 0.61 percent.” However, this appears to be another example of the Broken Window fallacy refuted by Frédéric Bastiat in his famous essay “That Which is Seen and Unseen.” In the introduction Bastiat states that

in the economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.

By raising wage rates, the public can see their states’ minimum-wage earners making more money. This is the factor that is seen. What is unseen is the number of jobs destroyed or citizens who would have been able to obtain jobs if the minimum wage were never raised in these states in the first place.

But even the government statistics do not add nearly as much support as the pro-minimum wage group implies. Florida, for example, was one of the thirteen states that raised its minimum wage to $7.93 per hour as of January 1, 2014. Looking at monthly seasonally-adjusted employment and unemployment data for Florida, comparing January to May 2014, we find that the unemployment rate actually increased from 6.1 percent to 6.3 percent, respectively. The unemployment rate of Florida might be several times larger but for the fact that only those still actively seeking work are considered to be employed, and do not include those who are underemployed or have given up looking for work. In addition, this data clearly demonstrates that the Florida unemployment rate was decreasing every month prior to the minimum wage being raised from 7.4 percent in July 2013 to 5.9 percent in December 2013 before increasing to 6.3 percent upon introduction of the new minimum wage in January. It’s dangerous to draw broad conclusions from a single statistic like this, but it’s clear that we can hardly conclude, as Garofalo has done, that minimum wage hikes “have little to no effect on employment.”

Another weakness behind the claims that minimum wages raise the well-being of workers, is that it does not state what kinds of jobs are being created. An increase in government jobs, for example, does not create added wealth to a state’s economy. In fact, such jobs are a drag because they have to be paid for by imposing higher taxes on the productive sector of the economy.

Even more uncertainty is added if we consider Cantillon effects, which tell us that in response to money-supply inflation, prices (including labor prices) do not change uniformly and at the same speed, so the effect of raising the minimum wage will be different in each of these thirteen states.

Finally, if raising minimum wages does increase the number of jobs in these states, why don’t their governors and legislatures raise the minimum wage to $100 to $1,000 dollars per hour? To ask the question is to answer it as even these interventionist politicians know that no one besides government bureaucrats would still be employed under such as system. Any first-year economics student knows that, all things being equal, as the price of an item increases, demand for that item decreases accordingly. Wage rates are labor’s price. As wage rates increase, employers demand for workers will decrease. By increasing the minimum wage, politicians in these thirteen states are condemning many of their citizens to unemployment.

Murray Rothbard perhaps said it best when he argued that the minimum wage “is compulsory unemployment, period … the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.”

This article originally appeared at Ludwig Von Mises Institute

  • Marcos Garza

    Totally agree with this article.