Control is the Disease, Minimum Wage the Symptom, Freedom the Cure

Few probably took note of this article by Diana Furchtgott-Roth.  It is worth the read.

President Obama did promise to raise the minimum wage during his campaign.  His reading the article is doubtful.  This is unfortunate, since Ms. Furchgott-Roth is an expert in labor economics, and her point is valid not just for American Samoa, but for America as a whole.

In 2007, Congress voted for and began raising the minimum wage.  In just over two months, the minimum wage will be raised again, to $7.25 per hour from 2008’s raise to $6.55 per hour.

Anyone with a high school understanding of economics knows or can understand what the minimum wage is:  It is an artificial “price floor” for labor.  A price floor, as the name indirectly suggests, is a certain minimum price at which none of a product or service can be found.  There are some natural price floors, but as a general rule they are artificial; that is, a government, regulatory body or trade association sets these price floors, not the consumer.

Companies set price floors by production levels.  At certain levels of supply, the the amount of demand will naturally be match that supply at a certain price.  This is a “natural” price floor: Producers could produce more, but they want a higher price.  Producers of collectibles attempt to take advantage of natural price floors with “limited edition” products.  Super-luxury automobiles the same (seriously, how much better is a Rolls Royce compared to a Lincoln?).

Regulatory bodies also set price floors.  When OPEC sets oil production at a certain number of barrels per year, it is attempting to take advantage of an artificial price floor.  Milk producers in the United States are sometimes limited in production by regulators to ensure profitability in that industry.  Farm subsidies encourage higher prices by paying farmers to not grow food.  Environmentalists have endorsed raising taxes on oil to ensure a price floor and encourage us to use less gasoline and home heating oil.

Governments can also set direct artificial price floors, and that is the essence of the minimum wage.  Government assures a certain wage level either by regulation or legislative fiat.  “Below this price, one may not employ labor.”

There is a significant problem with the minimum wage that the President needs to recognize: It assumes the same level of employment both before and after its implementation.  This is ridiculous!  The resources available to employers is the same both before and after the minimum wage increases.  In order to maintain employment, something must be cut somewhere else.  If other expenditures and investments are not cut, employment must be, or the owners of the business must accept that their profits (and therefore, their wealth) will decrease.  No matter what, somebody loses.

Enacting the minimum wage has reprocussions that are easily foreseen but willfully or purposely ignored by politicians.  The change in cost of resources forces employers to make choices: They must reshuffle the makeup of their inputs (that is, raw materials, labor and energy) in order to maintain profitability.  Since re-engineering a product or investing in more efficient production equipment requires the use of even more resources, the easiest thing to do when dealing with a minimum wage hike is to reduce the number of employees or the number of hours and require more productivity from those still working.

This is not supposition on the part of the author, it is economic fact as seen in Diana Furchtgott-Roth’s commentary.  When the minimum wage increased on American Samoa, the Tuna industry pulled up stakes and moved its production elsewhere.  If one prefers, the aggregate data for each month shows how unemployment had stabilized and was slowly and consistently falling from its peak in early 2003–until the minimum wage hike occurred.  Taking a close look at the data is revealing: Unemployment began rising in early 2007, just after the hike was passed by Congress and long before the recession began in December 2007 or Quarter 3 2008 (depending on the chosen definition of “recession”).

Businesses are founded for a particular purpose: They provide a valuable product or service to consumers in exchange for money, which is then used to develop and produce more products, pay their employees for their labor and to enrich the owner’s personal wealth.  They do not exist simply to break-even.  That is called “charity,” and neither businesses or charities are founded to lose money.  Because of this, when costs increase, both charities and businesses increase revenues or, if revenues cannot be increased, they reduce costs.  As discussed previously, labor is one of the easier costs to reduce.  Unemployment rises, and once again, everyone loses.

Businesses have another option, of course.  They can move their operations elsewhere.  This was seen again in Ms. Furchtgott-Roth’s commentary.  One of the two major Tuna producers moved its operations entirely out of American Samoa to Georgia.  They are hoping to take advantage of proximity to customers now that their labor cost advantage is gone.  Usually it works the other way around: Factories and service centers leave the United States in search of cheaper labor in Asia and Central America.  America’s loss is the rest of the world’s gain.

As one can see, the minimum wage, intended as a way to help American labor maintain a better standard of living, has actually driven away industry, increased unemployment and caused greater suffering than anyone is ever willing to admit.  Hikes in the minimum wage increase unemployment, reduce prosperity during economic expansion and exacerbate economic downturns.  The solution is not an increase in the minimum wage, as the President suggested during his campaign, but rather to stop raising it (or better yet, eliminate it).  This well-intentioned but horribly naive price floor system is harmful to our economy and to our continued prosperity.  By eliminating it, businesses can reduce costs and afford to employ more labor than with the minimum wage in place.