Legislating Unemployment


Congress recently passed a bill to increase the number of unemployed persons by 1.5 million. It was not, of course, called the Unemployment Act of 1977. No, in the semantic quagmire known as Capitol Hill, it was called "an increase in the minimum wage, from $2.30 to $2.65/hour, as of Jan. 1, 1978."

Things could have been worse. The House turned down a provision to make future increases automatic, increased the small-business exemption from $250,000 annual sales to $500,000, and squelched earlier proposals for an immediate increase to $3.00 an hour.

Yet the increase is ironic, coming at a time when awareness of the job-killing effects of minimum wage laws is finally becoming widespread. During the early 1960's, economist Yale Brozen was like a voice crying in the wilderness, pointing out that increases in post-war unemployment rates—especially among youths and nonwhites—were correlated with increases in the mandated minimum wage.

By 1970 this view had begun to pick up support. Economists at Ohio University, the National Bureau of Economic Research, and Rand Corporation developed econometric models confirming Brozen's results. Other economists, including MIT's Paul Samuelson, began speaking out, but to no avail. Every few years Congress legislated new increases. All the while the ratio of black to white teenage unemployment kept climbing-from 1.2 in 1949 to 2.9 in 1977. By August 1977 the unemployment rate for black teenagers had reached 41 percent, compared with 14 percent for white teenagers (and about 3.5 percent for white males).

Within the last few years, additional studies have removed any lingering doubts about the connection. James F. Ragan's 1974 doctoral dissertation quantified the link between youth unemployment and minimum wage increases; his results were recently published in Harvard's prestigious Review of Economics and Statistics. Dr. Edward Gramlich completed a similar study for Brookings Institution last year. And the US Chamber of Commerce now has its own 50-state econometric model that has been used to analyze the unemployment effects of the most recent proposals.

But the real breakthrough has been the growing opposition to new increases among non-economists. Harvard sociologist David Riesman recently called the minimum wage the product of "an alliance of the better situated labor unions with the liberals against the deprived and the elderly, whom people would otherwise employ for household or city work that now doesn't get done." And even the New York Times, in an editorial titled "The Cruel Cost of the Minimum Wage," has come around. Noting that an increase "will make it more difficult for unskilled workers to find employment" and will "destroy the jobs of those at the very bottom," the Times came out flatly against increasing the minimum.

Perhaps the cruelest effect of minimum wage laws concerns minorities. For a variety of socio-cultural reasons, a higher percentage of blacks and some other minorities still wind up with fewer job skills, less education, and poorer work habits—i.e., are less desirable as employees, other things being equal. Second, some employers are still prejudiced and would prefer not to hire some minorities, other things being equal. In a free market, minority individuals facing employer reticence, can give themselves a competitive advantage, making "other things" unequal: they can agree to work for a lower wage. By doing so, they appeal to the employer's self-interest, hoping to overcome their relatively lower skills or the employer's prejudice.

Minimum wage laws deprive disadvantaged job-seekers of this chance to even up the odds. In a free market, so long as minorities (on average) are seen as less desirable employees, a compensating wage differential will exist. An employer who refuses to hire a discount-priced minority worker pays a very visible price for indulging his prejudice. But minimum wage laws remove this price, notes black economist Walter Williams, thereby letting employers discriminate without cost.

Small wonder, then, that Milton Friedman refers to the minimum wage law as "the most anti-Negro law on our statute books." And that black economists such as Stanford's Thomas Sowell and Harvard's Andrew F. Brimmer have joined Prof. Williams in speaking out against the minimum wage.

In the face of this evidence, how can such crusaders against poverty and discrimination as Jimmy Carter, Hubert Humphrey, and Teddy Kennedy actively work to put low-income blacks, Puerto Ricans, Mexican-Americans, teenagers, and old people out of work? The answers boil down to just one word: politics.

The short answer is that liberals and Democrats, who currently make up the majority in Congress, are deeply in hock to George Meany. And organized labor can only benefit from increases in the minimum wage. By reducing competition from low-wage, marginal workers, higher minimum wages make more secure the jobs of high-wage union members. Over the years support for increased minimum wages has come consistently from Congressmen in highly unionized northern states, to counteract competition from non-union, lower-wage plants in the South and West.

But there's an even more insidious reason for big-government advocates to support minimum wage laws. By increasing unemployment among the poor and minorities, they create further demands for expanding their role. The more people in distress, the more "need" there is for an all-encompassing State to pass new poverty programs, new affirmative action programs, new make-work programs. It is therefore in the self-interest, not only of Congressmen, but also of the whole welfare/social services establishment to push for measures such as minimum wage laws that expand the "market" for their services.

The situation perfectly illustrates the difference between political democracy and market democracy. Self-interest is the motivating factor in both cases. In the political approach self-interest operates with the force of law. Those groups with the greatest clout impose solutions that maximize their self-interest, at the expense of the interests of the poor and minorities. In the market approach, by contrast, the self-interest of individual low-skilled workers allows them to compete with higher-skilled workers in appealing to employer self-interest. Low-skill persons have a chance to become self-supporting, rather than becoming pawns of the State and its bureaucracies.

In the recent Congressional debate on the minimum wage, many of its defects were noted, especially its impact on youths, and minority youths in particular. An amendment to create a lower minimum wage for teenagers was defeated by one vote in the House. While such a "teenwage" would undoubtedly have helped some teenagers (estimates ranged from 225,000 to 617,000 jobs saved), many would have been children of affluent families seeking summer jobs—not ghetto youths desperately seeking to be self-supporting. (Remember the no-cost discrimination effect!)

The answer does not lie in a lower minimum wage. It lies in abandoning the concept of job price fixing altogether. Only by substituting the democracy of the marketplace for the democracy of political power can job opportunities be created for everyone.