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Economic Fallacy: Minimum Wage Doesn’t Cause Unemployment

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Politicians and the media have done a great job of convincing ordinary Americans that they know what they are doing when it comes to managing the economy. Even though they are the ones who got us into our current mess, the electorate continues to send the same pols back to Washington and they continue to watch financial news networks that act more like cheerleaders for government policy than objective analysts.

Take President Obama’s proposal to increase the current minimum wage from $7.25 an hour to $9.00 an hour for instance. When polled, huge majorities of Americans support the proposal.

But, it is an economic fallacy to believe that even having a minimum wage will not cause unemployment. Basic supply and demand tells us that as the price for a good or service increases, demand is diminished. Conversely, as price falls, demand increases. That is why when I go to see my hometown minor league baseball team, I and many other patrons wait until the ninth inning of the game to buy pizza because by then it has been marked down to increase demand, preventing leftover unsalable pies. Depending on the attendance remaining at the end of the game, I often have to rush down to the concession stand to get my pizza before the lower price produces the desired effect: no more pizzas.

Now, I understand that pizza is a good to be consumed at a baseball game and labor is a service provided by workers to employers. But, in terms of the pricing mechanism, labor is no different than pizza. A government-mandated price floor (minimum wage) does not give the worker the opportunity to negotiate a wage with the employer below that price floor. In many cases workers are willing to accept lower wages but are legally not able to. Thus, because labor is priced above its market value there will be less demand for it. In other words, less workers will be hired until the wage rate floor is allowed to adjust down. Of course, unlike the pizza, that will never happen because that would be political suicide for politicians.

With regards to Obama’s proposal to increase the minimum wage from $7.25 an hour to $9.00 an hour, most jobs that currently pay between those wage rates will be eliminated in the future. Why would an employer pay $9.00 an hour for an employee who is worth, either through skill or job requirements, only $7.50 an hour? In most cases they wouldn’t. Thus jobs will be eliminated and current employees will be expected to do more. Any way you slice it, minimum wage laws limit employment and therefore cause unemployment.

In the final analysis, it is incumbent on citizens to understand basic economic principles and how government’s violation of those principles will affect the economy. Simply believing that those who gave us the current economic mess are also the ones to get us out of it is asinine. Believing minimum wage laws don’t increase unemployment because the President proposes increasing the current minimum wage is irresponsible.

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About Kenn Jacobine

  • Alexander J Smith III

    -Kenn

    If the minimum wage is supposed to the the lowest level where one can work and earn a reasonable living (as it’s intended), and (generally) the purpose of working is to make a living, why then would a worker want to negotiate with an employer for a wage that’s below the minimum level pay needed to make said reasonable living? That doesn’t make sense.

  • llort

    …counter arguments

    some case studies would be useful to support your statement of theory here Kenn…

  • llort

    …btw Kenn – your comparison of a worker in dire straights forced to negotiate for a lower wage to a pizza is…..disturbing

  • Kenn Jacobine

    #1. The point was that at the higher minimum wage there may not have been a job. But the worker who is desparate for a job to feed himself cannot go to an employer and agree to get paid less than minimum wage if it means he can get a job from the employer because of the law.

  • Kenn Jacobine

    Your counter arguments are unsubstantiated. The first argument for raising the minimum wage is that it is too low. How would anybody know that? The market is the best determinate of price. Some politician or government numbers cruncher can’t determine the price of anything – think Soviet Union, Cuba, North Korea, etc… Labor costs are no different than rent, food, or fuel costs. When the government determines floor or ceiling prices there are either surpluses or shortages – think Nixon price controls.

    In any event, with your thinking, why not make the minimum wage $30 per hour? We would all be rich?

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    The first argument for raising the minimum wage is that it is too low. How would anybody know that? The market is the best determinate of price.

    Well, I imagine that one would look at the market prices of basic goods, services and utilities and determine from that whether a certain wage was sufficient for the average worker to afford them.

    Crikey. I thought rocket science would be harder than this…

  • Kenn Jacobine
  • Alexander J Smith III

    -Kenn, in response to #4

    That still doesn’t address the underlying concern that the minimum wage is supposed to reflect the “lowest” level a wage can be in order for a worker to live at cost for food/shelter/clothing etc. then why would a person, even in desperation, willingly negotiate to earn pay at a rate below that?

  • http://danmillerinpanama.wordpress.com Dan(Miller)

    In addition to Ken’s arguments, might I suggest that economic conditions differ in different states and even in different areas within states? I can think off hand of no valid economic reason why minimum wages should be the same in, for example, New York City and in a small town in Mississippi.

  • G l e n n C o n t r a r i a n

    Dan –

    A breadwinner working full time at minimum wage isn’t enough to keep a family out of poverty even in a small town in Mississippi…and I do know a bit more about small-town Mississippi than most people.

    So if it’s not enough in Mississippi, all the more it’s not enough in New York City.

    By paying people so little even when working full time that they are FORCED to remain on government assistance just to keep to keep a family fed, clothed, and housed…that’s not a sensible way to foster growth. All that does is cost us more taxpayer dollars.

    That’s the choice, Dan. Either you pay a few dollars more at the cash register so people can pay a living wage (as Adam Smith himself said is necessary), OR you can pay a few extra tax dollars in order to provide the government assistance that these people need in order to be fed, clothed, and housed.

    You pay either way, Dan…so which will it be?

  • G l e n n C o n t r a r i a n

    Kenn –

    So what countries are there that don’t require a minimum wage?

    And how are the economies of those nations doing?

    You see, Kenn, at some point you’ve got to look at the results of the different economic systems we have in the world. There ARE economic systems that are fairly libertarian in this world, and you know it…but how are those systems functioning as measured by the standards of living under those economic systems?

    Results, Kenn. Give us results, and THEN base your arguments on those results.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    Glenn, since no country on earth had a legal minimum wage prior to 1894 when Australia and New Zealand introduced one, and since there were plenty of prosperous nations prior to 1894, I think that by correlating the two you’re on shaky ground here.

  • Glenn Contrarian

    Doc –

    I’m referring to the modern world, post WWII. I admit I should have been clearer on that. It’s always been my contention that in the modern world, there is no economic system that is as successful as that which is used by every non-OPEC first-world nation today. Now some like to claim that it’s because we won WWII, we implemented the Marshall Plan, and that all the world had to come to us for what we built, but the experiences of Taiwan (which AFAIK never received any Marshall Plan funding), Japan (which was truly devastated by our bombing but received no further major funding after the end of the Marshall Plan), and South Korea (devastated in the Korean War, probably received Marshall Plan funding but that’s about it) show that yes, the kind of economic system in use today works better than any other economic system.

    Doc, before WWII there were no economic systems like today’s because technology had not developed to the extent that it has today, where infrastructure is more comprehensive than anyone in the Industrial Revolution could have dreamt possible. That’s why I only rarely bother referring to any national economies before WWII, because usually there’s no way to compare them to the national economies of today.

    I won’t bother asking you to address the questions I posed Dan and Kenn, because instead of disagreeing with me, I suspect your issue was more about how I presented my argument. You wanted to hold me to a higher standard, and I appreciate that.

  • roger nowosielski

    Judging by the lack of response to #3, it would appear that Kenn either fails to understand the point raised therein or simply regards it as irrelevant.

    Which is it, Kenn, just for the record?

  • Kenn Jacobine

    Roger, the remark is typical left-wing rhetoric that doesn’t deserve the dignity of a response.

  • Dr Dreadful

    Expressing concern about equating a human being with a pizza is “left-wing rhetoric”??!?

  • Glenn Contrarian

    Kenn –

    To more directly address your article,

    With regards to Obama’s proposal to increase the minimum wage from $7.25 an hour to $9.00 an hour, most jobs that currently pay between those wage rates will be eliminated in the future. Why would an employer pay $9.00 an hour for an employee who is worth, either through skill or job requirements, only $7.50 an hour? In most cases they wouldn’t. Thus jobs will be eliminated and current employees will be expected to do more.

    Can you give an example of ‘most jobs…will be eliminated’? Especially given the fact that America’s unemployment rate did not skyrocket when the minimum wage was instituted? And while you’re at it, if the minimum wage causes unemployment, then why didn’t our poverty rate rise when it was instituted? Furthermore, what is the unemployment rate and poverty rate in states that have a higher minimum wage as compared to those of states that have a lower minimum wage?

    In other words, Kenn, if you make a claim, you’ve got to be able to demonstrate the veracity of that claim against the available data. I say you can’t do it. Can you?

    FYI, Kenn, if you’ll check, you’ll find that what led to high unemployment had much less to do with the minimum wage and much more to do with our manufacturing base going overseas.

  • Glenn Contrarian

    rejected comment again – please fix.

    And it was a relatively short comment with no links – this is getting ridiculous, y’all.

  • http://www.RoseDigitalMarketing.com Christopher Rose

    And fixed…

  • llort

    …re parenthetical Dan’s #9 – as far as I know there is nothing in the proposal to prevent States and localities from setting their own minimum wages depending on local circumstances; just have to be greater than the Federal minimum :>

    Kenn – thanks for the cato link where at least there’s an attempt to bring evidence to bear

  • llort

    …here’s another

  • llort

    (editor – pls chk to see where the rest of #21 went…coding error or am I simply unlovable?)

  • Dr Dreadful

    No coding error that I can see, troll; in fact, no code of any kind. The comment appears, as far as I can tell, exactly as typed.

  • llort

    then I’ll reenter – here’s another lefty write up on the topic with more cases looked at

    I have little sympathy for any of these arguments in fact as imo there need be no wages at all – but any barricade in a storm I guess

  • roger nowosielski

    wages to be replaced with shares. dividends, etc.

    Now, that’s really thinking outside the box.

  • llort

    Roger – there’s a cosmic hustler I know going down that path…chk out Lynn Sereda’s Quantum Economics

  • roger nowosielski
  • Dr Dreadful

    …which I’ve always thought would be a very snappy brand name for a contraceptive.

  • STM

    Kenn: “desparate for a job”.

    Teacher, too. Glad it’s not my kids, and not just because of the lit.

  • STM

    Minimum wage should realistically be set at something in the region of $13 an hour.

    Even that’s not enough to live on.

    It might help kids get through university with a part time job, but if it’s applied to full-time employment, there isn’t much hope of using that to lift yourself out of the poverty cycle.

    However, at the bizarre US figure of nearly $8 an hour (I’m being generous, unlike too many employers in America), there isn’t any hope at all.

    It’s an absolute insult to pay a person $7.25 an hour – unless they’re a kid.

    How is there such a disconnect, say, between the worth of the labour of a cleaner on that amount and the wage of a CEO (whose company generally does a good job of running itself) at $725.00 an hour.

    A CEO gets the flick, and the company nearly survives just fine.

    No cleaners, and everything’s out the window. Literally, in some cases.

  • STM

    Chris or Doc, I’ve had a comment blocked. Nothing controversial and no dirty words.

    What gives? I haven’t been here for a few months because of it, and it’s still going on.

    Any chance of freeing that last one up??

  • roger nowosielski

    Good to know you’re still around, STM.

    And yes, apropos your #29, I, too, wouldn’t have my kids anywhere near him, not if I could help it.

  • http://www.squidoo.com/lensmasters/IanMayfield Dr Dreadful

    Comment duly liberated, Stan.

    Just holler if any more get blocked, ’cause it isn’t always immediately obvious to Chris and me…

  • STM

    Thanks dudes

  • STM

    Even the cleaners who spruce my house up every couple of weeks get about $US25 an hour.

    That’s pretty standard in Oz. That’s what happens when you have a 100-year-old industrial arbitration system (which is a court) ruling on what constitutes decent working conditions and living wages.

    You’d think millions of businesses would go to the wall here if Kenn’s reasoning were applied, but they aren’t.

    Our unemployment rate is way lower than that of the US (under 5 per cent all through the GFC), and the economy here remains very strong.

    One of the things people always comment about when they visit this country is how well off the middle class are – and in fact, this country is almost one giant middle class.

    Plenty of very wealthy people too, and lots of safety nets for the poor and vulnerable to keep them well above the poverty line.

    Having seen first hand how a so-called “socialist” country (in Kenn’s confused mind) can consistently do better than the US in terms of living standards and lifestyle for the majority of its citizens, in lower unemployment and higher wages, and an economy that isn’t going to hell in a handbasket, just makes me feel pity for Kenn and his bollocks arguments.

    Problem is, some idiots will believe him.

  • llort

    …it will be interesting to see if Australia will continue its extraordinary period of recession free growth when its current mining investment boom goes bust

    …better than 20 years of constant growth yet 1 in 8 Australians doesn’t earn enough to get above that country’s poverty measure without assistance

    capitalism sucks

  • Glenn Contrarian

    llort –

    better than 20 years of constant growth yet 1 in 8 Australians doesn’t earn enough to get above that country’s poverty measure without assistance

    Yeah, but at least all of those Australians in poverty have access to quality health care…and if you don’t think that’s a big deal, take a look at our homeless sometime….

  • roger nowosielski

    a better ratio (thus far) than anywhere in the West, except for Germany perhaps, but yes, will it last?

    Another question: are the one/eights fully fledged citizens? Perhaps Stan can answer that.

  • cindy

    I find this article to be dripping with market-based religious ideology.

    The author asks, in a comment, “The first argument for raising the minimum wage is that it is too low. How would anybody know that?”

    I expect people working full time might know something about that.

    A priori presumptions, such as “The market is the best determinate of price.”, completely blind the author. One may as well be reading about economic issues in a bible.

    This bible tells us that the slavemasters should be deferred to because they have managed, through systems which favor them, to own stuff everyone needs. Everything should be based on what the privileged (who originated the system) require.

    An article by Carl Hiassen, about state run home owner insurance makes an interesting example of how these ideologies end up working in the real world. He manages to point to the problems with both of the current dominant perspectives in thinking in politics.

  • cindy

    can someone retrieve my comment?

  • G l e n n C o n t r a r i a n

    Roger –

    “but will it last?”

    One has to ask which is better – to have a better ratio for a generation or so, or to not have a better ratio at all?

  • http://www.RoseDigitalMarketing.com Christopher Rose

    Cindy – rescued!

  • cindy

    Expressing concern about equating a human being with a pizza is “left-wing rhetoric”??!?

    Of course it is, Dr.D. That is the pathology of right-wing thinking. They appear to take for granted that people are no more valuable than a variable in their calculation. In this case a pizza.

    29 – STM

    Kenn: “desparate for a job”.

    Indeed. Great system.

    Please raise your hand if you want the fair and reasonable market system where you get to become so desperate for a job from some rich assholes who own everything that you can be allowed to compete with undocumented workers for lower than minimum wage.

    Minimum wage is depriving people of their freedom to engage in a market in order to prostitute themselves for less and less than they could ever live on.

    Only in the land of the free…

  • cindy

    TY Christopher.

  • G l e n n C o n t r a r i a n

    Well said, Cindy….

  • STM

    In regards to the one in eight figure touted, all I can say is that the level of poverty here is way less than anywhere else I’ve seen.

    Yes, it exists, but there are safety nets. Quality health care is the best one.

    What one Aussie gets, every Aussie gets. Even with my choice to have private health insurance so I can use the private system – often that simply means my choice of specialist doctor in a public hospital – my first conduct with the health system will be within a public hospital.

    It’s not free of tax … we pay for it in our taxes, but those earning more pay more and those earning less pay less.

    I don’t have a problem with that and nor do the vast majority of Aussies.

    A degree of compassion for your fellow man isn’t a bad virtue on which to run a country.

  • roger nowosielski

    It’s not a bad virtue on the basis of which to run our individual lives as well, if I may say.

  • llort

    here’s a link to the report (pdf) from which the 1 in 8 figure came and

  • llort

    please release my blocked comment – thanks

  • cindy

    those earning more pay more and those earning less pay less

    practically straight out of the communist manifesto 😉

  • STM

    Cindy: “practically straight out of the communist manifesto ;-)”

    Yes, no doubt – especially if you were to ask our mate Kenn.

  • http://www.RoseDigitalMarketing.com Christopher Rose

    Troll – we have liberated your comment!

  • llo rt

    chopped again – so I’ll reenter

    and here’s a link to a report interpreting the finding

    my comment was about capitalism more than Australia of course – even under the best of conditions poverty and the beneficent state are part of the deal

    in the US when you’re poor you get free cheese – it’s awesome

  • llo rt

    chopped and blocked again…never mind

  • http://www.RoseDigitalMarketing.com Christopher Rose

    That chopping is strange, but it wasn’t us…

  • llort

    (might be something to do with using a completely stripped down version of opera to deal with BC – perhaps writing comments w/ links in blogger then cutting and pasting will solve the problem for me)

  • Dr Dreadful

    might be something to do with using a completely stripped down version of opera to deal with BC

    It ain’t over ’til the farrier comments.

  • llort

    …if you can’t trust your shoer who can you trust?

  • roger nowosielski

    @56

    That’s what I’ve been doing of late, which improved the results.

  • roger nowosielski

    The following excerpt from a comment on CT, “Socialism Without a Map,” that’s of some relevance to your #24, llort:

    ” . . . we have currently in Italy a party, the m5s (or rather a movement ) that endorses many of these small utopias. For example they have the universal citizien income in their program, and they speak big of free software.
    However their party is based on leninist democratic centralism (elected officials who disagree with party line are kicked out and tarred as “traitors”), ultra aggressive rethoric in the style of Marx and Lenin (they never speak the name of their opponents, always use offensive nicknames as a choice) and seem more interested in destruction (kick the bums out) than in construction, because they too have this romantic view that every evil of the world is caused by evil politicians.
    I think most revolutions were made by guys like these, and were revolutions against rather than revolutions for.”

  • roger nowosielski
  • STM

    F.ck, why didn’t I think of that.

    Those M5S dudes have got it wired (or not, as the case may be): The answer to all the world’s problems is … free f.cking software!

    So simple and so obvious … now.

  • STM

    WTB, olleh llort!

  • roger nowosielski

    I thought you’d get a kick out of that.

  • STM

    G’day Rog. That’s made my day, even though it’s just about over. Cheers

  • roger nowosielski

    Well, Stan, at least you can relax now and kick back.

  • llort

    salutations surfer dude…so how have you guys been able to avoid recession for so long do you think?

    Roger – I’ve been following the conversation on CT…utopianism…as Anarcissie implied in an early comment: all we can do is be the change as best we can…go help feed folks on a Saturday or weed a community garden or something I guess

    …I wonder how many garbanzo bean plants it would take to prepare humus for 10000

  • roger nowosielski

    @67

    The only way I can be the change is by treating people with dignity. Not an easy thing to do and I don’t always succeed, but I try.

    As to my writing, I can’t help it. It’s one of the few things I do best, and so I keep on plugging along, regardless of whether it will make a difference or not.

  • llort

    …the notion that writing and working with ideas is immaterial is wrong-headed imo

  • roger nowosielski

    Of course I don’t subscribe to that viewpoint; still, I have no choice but to proceed regardless, as if it didn’t matter.

  • llort

    do your thing…every little bit of constructive subversion and creative sabotage helps I guess

  • roger nowosielski

    I’ll try to live up to this motto, for better or worse.

  • roger nowosielski

    In any case, most of the threads on CT are disappointing, except for Ana and the recent input by Eric Wright. IMHO, most of these people are just too impressed with themselves to do any good.

    It’s a pity, sort of, especially since they’re all smart, erudite, eloquent — you name it. I’m not exactly certain what’s missing, but something definitely is.

    A kind of will coupled with spirituality perhaps, a drive, determination, a life force.

    Again, the hubris is, they”ll all too impressed with themselves.

    Ana of course is a cut above, which is why I respect her so.

  • llort

    the discussion does have that faintly fecal recuperative smell (situationistically speaking that is)

  • llort

    …you want a utopia?

    make one and give it away

  • G l e n n C o n t r a r i a n

    llort –

    …you want a utopia?

    make one and give it away

    Over the years I’ve come to believe that happiness is also a learned skill. Just something to think about….

  • llort
  • cindy

    llort,

    Is that anything like repooperation? lol

  • llort

    mighty morphing capital with its sycophantic working class reclaiming their pound of flesh – free thinking isn’t free

  • Glenn Contrarian

    Or to put what I said another way, just like we can learn to control our temper, we can learn to be happy. Of course, just as there are times that we lose our temper, there are times we can’t be happy…

    …but as with so many things, it’s a matter of degree.

  • S.T.M

    I keep posting replies to Llort that are being bloc ked. Sorry, man, but the site obviously doesn’t like what I’m saying.

    Just sayin’

  • roger nowosielski

    it’s because you don’t address him by the right name: it’s “troll.”

  • roger nowosielski

    As for Glenn, this moderation bit gets to be kinda stale.

    Christ would surely spew him out from his mouth and then some, and then take a good dose of mouthwash to get rid of the nasty aftertaste, for being a lukewarm Christian.

  • http://www.RoseDigitalMarketing.com Christopher Rose

    Stan, There aren’t any comments of yours in the spam trap.

    It is nothing personal when comments are blocked, it’s just random. I have had the same problem myself.

  • Glenn Contrarian

    Roger –

    I know the verse to which you refer – but He’s referring to matters of faith whereas I’m referring to one’s degree of happiness…and faith and happiness are not at all the same thing. Nice attempt to try to get me to feel bad, but I’ve no inclination to be misery’s company.

    If you want to get me to stop using a particular line of argument, it’s really easy – all you have to do is to show me how that line of argument is wrong.

  • roger nowosielski

    ‘The enterprise ain’t worth it, Danny boy.

  • llort

    Glenn – ahistorical teleological quasi-quantitative nationalistic utilitarian premisses yield absurd propositions…just something to ponder

  • Glenn Contrarian

    troll –

    afuturistic Lovecraftian proto-undeterminable anarchistic non-MacGyverian aftermisses preclude omniscient experiences too.

    So there!

  • llort

    …which might be pertinent were omniscience at issue rather than soundly developed arguments per your #85

  • http://www.RoseDigitalMarketing.com Christopher Rose

    Perhaps he didn’t understand your comment, troll; it has taken me ages to work out what it meant – and I’m still not entirely certain about your exact meaning! And I assume it was “premises” you meant, not premisses.

  • Glenn Contrarian

    troll –

    ….

    *scratches head and wanders off groggily towards the coffee pot*

  • llort

    …and I thought that it was a relatively straight forward criticism of Glenn’s arguments from the “greatest good” principle listing areas of concern with utilitarian theory generally and with his particular application

    (I’ve about given up correcting my incessant spelling errors)

  • Glenn Contrarian

    Oh, it was – but the bow that wrapped this particular package you presented was tied by someone named Gordy….

  • S.T.M

    Llort, let’s give it another go.

    Yes, we have a continent full of stuff that can be dug up from the ground, and which every other bastard wants. That might not be so good for us in the future if things go awry, but the truth is, this whole continent is like a giant slab of iron ore. When you go outside the coastal plain, you see it in the dirt and dust – it’s universally red. I drove twice halfway across the continent last year, and the cars were full of red dirt.

    However, somehow we have managed to keep our manufacturing industry going in spite of the high Aussie dollar – exports are critical to us because of our small population – but there are signs this needs a good kick along somehow.

    However, as this is a giant middle class, Aussies earn good money, which means they have cash to spend at home.

    Confidence is down somewhat, but we’ve managed to dodge the bullet so far.

    That wooldn’t be the case, though, if this Labor government were to remain in power for much longer.

    They’re shot ducks, though. The polls show they’re facing annihilation in the September federal election.

    It is very sad. The Labor Party is the party responsible for Aussies having such a high standard of living, because it has fought very hard over the years for the rights of workers.

    It has lost its way … and its soul.

    That is the real tragedy for this this country currently.