Saturday, July 11, 2009

Minimum Wage, Maximum Stupidity By Peter Schiff

Minimum Wage, Maximum Stupidity

By Peter Schiff

In a free market, demand is always a function of price: the higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way. Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits.) So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers’ dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.


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  1. Vance MacLarenJuly 12, 2009

    I generally like Peter Schiff's ideas, but I have to admit that his opposition to minimum wage laws struck me as mean spirited.

    Then I was was a McDonald's today and I saw all the kids there working very hard (20 years ago I worked at a McDonald's too and believe me it is very hard and stressful work). I remembered Dr. Schiff's blog and I thought: in a world without minimum wage laws, would more kids have a job this summer, and would each of them not have to work so hard? Hmmmm maybe there is something to this deregulation thing.

    thank you.

  2. AnonymousJuly 14, 2009

    Just my 2 cents in here:
    The lower the price, the lower the demand, the higher the demand, the price goes up as well.

    Then, as time goes by the higher the price the lower the demand (because ppl wont be able to buy that good), and viceversa the lower the price the lower the demand (because ppl might already have one)

    However, I agree with Peter's commentary about wages:
    If you're an employer and your budget in salaries = $100 for 10 employees, (supposing that the minimum wage = 10 in this example), if the government increases the minimum wage by 50%, then I would be having 2 options:
    1 - Get rid of some of my employees to round my budget into $100 back again (thus, creating an increased unemployment level in a macroeconomic view).
    2 - Increase my prices by 50% to accomodate the new minimum wage rise, thus creating inflation.

    I think that the governments strategy is to create inflation, instead of unemployment, however we dont know what will the outcome might be, if the economy can take this inflation or if by the contrary would repel this and make the bubble explode (by unemploying)


  3. AnonymousJuly 16, 2009

    " I remembered Dr. Schiff's blog and I thought: in a world without minimum wage laws, would more kids have a job this summer, and would each of them not have to work so hard? "

    I'm not an economist by any stretch and am in fact jsut beginning researching different economic viewpoints in the hopes of having a better understanding of, you know, what the hell is going on in the country.

    BUT if there were no minimum wage and then McDonald's could hire MORE kids so that they would not have to work as hard- wouldn't they be making less money per hour and then working fewer hours, thereby giving the kids (or perhaps, not kids but adults trying to support a family or themselves) less money? I guess it depends on whether or not the workers are trying to earn the most money possible or just want some money and to not work so hard. If you are talking exclusively about high schoolers, it could be either.

    Also (and I'm probably going to get excoriated for this if anyone ever responds to this) why is it assumed that employers will have to fire people or raise prices? Small business owners, yes. I can see how a minimum wage hike, would either cause them to have to fire workers or raise prices to accomodate the new wage. But I doubt that a large company (oh let's say Wal Mart) would go from being profitable to not because of a minimum wage increase. They could pay their employees more and not raise prices and they would still make plenty of money. The profits would go down somewhat, but I don't think they would completely disappear. I think it would still be a pretty profitable place.

    Like I said, I'm still reading about this stuff, but I'm a little wary of getting rid of the minimum wage laws.


  4. -Ash

    Productivity would go up if more people were able to work. The burgers at donalds would be cheaper because of higher productivity, so also almost every other product on the market.


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