Minimum Wage and Unemployment: A Zero-Sum Game

It is astounding that after decades of empirical evidence, there continues to exist misguided minds who fail to understand simple supply and demand and how these forces shape the minimum wage debate.

Numerous studies across different times and locations have shown overwhelmingly that higher mandatory wages equals higher unemployment for low skilled workers. This is a fundamental economic law, like gravity.

The Keynesians out there have always argued that you can have your cake and eat it too (just don’t pay attention to the accompanying debt and inflation). Their emotionally biased way of thinking has distorted the playing field for low skilled employees by creating artificial price levels. Instead of allowing the invisible hand of the market to function, these authoritarian policy makers prefer to interfere and dictate like the old Soviet Politburo (and we all know how that turned out).

Critics of capitalism love to point out its perceived failures, but how can a free market function, as well as be held responsible, if something as fundamental as labor costs are manipulated by the government? This backward way of thinking economically destroyes the low skilled workers, plunging them into higher unemployment rates rather than the utopian pie-in-the-sky promises of their advocates. Increased unemployment for the most vulnerable in society is the bitter harvest of their actions, accelerating the eventual replacement of these workers with machines.

Since the beginning of the last century, the unrelenting upward trend in technology has enabled production and standard of living improvements for those who choose to embrace it. The perceived paradox is that “outsourcing” workers with technology actually improves the collective lives of everyone in the long run by making things cheaper (sorry Karl Marx fans).

Unfortunately, human nature always resists meaningful change. Rather than embracing and adapting to the evolving marketplace, the public believes they can prevent the march of progress through misguided political solutions; solutions that always seem to come from power-brokers and academics who, more than likely, have never had to make a payroll.

Oxford University recently conducted a study that showed that 45% of all jobs are vulnerable to automation. We are not talking about just factory workers here, but doctors and lawyers as well. As the costs on implementing efficiency improvements drops, so does the need to maintain a large workforce. Do you have a personal assistant or an iphone? Do you still buy maps, record players, newspapers, or video tapes? You get the idea. Each and every day, humanity finds a way to do more with less. This is progress; this is how wealth is created. The problem, however, is if you’re the one being replaced. It’s absolutely devastating to start over for most people, and on cue, politicians are conveniently there to “help” with their cure--economic snake oil in the form of minimum wages.

The downward pressure on wages has only accelerated as the world has become smaller through globalization. What was once competition from across the street has become competition from across the world. Sooner than many care to admit, competition from a robot that doesn’t get sick, have babies, take breaks, ask for overtime, and can perform exactly the same in every situation may be a better option. Google has recently seen the light and acquired over seven robotics firms at DARPA levels in the last half year. Their commitment to adapt in response to these changes is steps ahead of most firms in managing the labor dynamics of the 21st century. The handwriting is on the wall, but the majority still refuses to hear the message: Anything that can be automated, will be automated!

Now what does this automation trend mean to minimum wage? If you raise the price of labor above a certain point, then you only hasten the day when your job will be replaced with a robot. Recently, Jamba Juice has begun rolling out their JambaGo self-serve machines and Applebees will be moving to drastically reduce its wait staff with iPad style ordering/payment machines on every table in. How long will it be before firms like Momentum Machines replace every burger flipper at McDonalds, you ask? If you hike the minimum wage, the answer is a lot sooner than you ever expected. This epitomizes the law of unintended consequences.

You have been warned. The irony of all of this is that the very people who are in favor of raising the minimum wage are the same people who will stand in a line wrapped around the building once the fancy burger machines go into effect. If you don’t like it, stop talking and start walking to a purveyor who shares your goals (that’s the free market, people). Vote with your wallet.

The largest factor in wage suppression is the supply of workers in the marketplace. As covered in Illegal Immigration: History’s Greatest Wage Suppression Tool, the constant influx of cheap, illegal labor undermines the overall wages the lowest skilled Americans can bargain for. So, if the number of job openings is stable, then by adding more workers you effectively drive wage levels lower. Notice how there is hardly any talk of what illegal immigration does to wages within the Democratic Party or from Big Business? This is not a mistake; it’s a deliberate omission. You can’t help those who are barely hanging on to America’s bottom rung by increasing the competition for jobs in their respective skill zones. 

Wage pricing is a negotiation between the employer and the worker who is selling his or her skills to the highest bidder. The value of a worker is not only a function of the employee’s skill, but also the level of the existing supply of workers who match that same skill level. The fact that politicians in both parties have looked the other way for decades regarding illegal immigration only shows how financially important it is to keep this illegal wage suppression tool in place.

The skill set of many illegal immigrants is on par with those Americans that our society likes to wax poetic about. Forget outsourcing--America’s lowest workers are essentially being in-sourced through illegal immigration and are offered a red herring through minimum wage increases to placate them. What will happen to these people if we grant illegals amnesty and continue to maintain a porous border, Mr. President?

The talk of minimum wage increases is nothing but a distraction from the failed political promises of leaders who continuously lie to the poor in order to secure their votes. To make up for their Keynesian failures, they resort to larger and larger government interventions to correct for the dysfunctional marketplace of their own design. Legislating higher labor rates is a clear sign of desperation and defeat. A healthy free market doesn’t need heavy-handed government intervention for the poor to prosper.

The reason this whole situation has become so problematic is that the welfare state provides an indirect wage subsidy to the very employers who now are singled out for failing to pay more for low valued skills. Had the expansion of entitlement programs been limited to just a small fraction of the population and the flow of illegal immigration been brought under control, the wages employers would have to offer would be higher to reflect the “living wage” argument.

Depressed wages will always be available if the existing pool of low skilled workers are provided with supplemental food, housing, and medical care. It is a perverse cycle that undermines the free market and corrupts the socioeconomic dynamic. By subsidizing the masses, you collectively hurts their ability to demand higher wages. Minimum wage arguments are, in reality, admissions that the Keynesian social engineering policies have failed.

Labor rates have always been, and will continue to be, a hot topic. Low skilled workers are having their wages suppressed through a combination of illegal immigration, technological alternatives, and indirect business subsidies through government entitlement spending. It’s important to understand that the government undermines the very notion of choice and liberty by its direct interference with the invisible hand of the market through legislative decree rather than mutual agreement.

The workers of the world will always want more for their labor. Employers will always try to get more for less. This, my friends, is how markets function. The key to all of this is understanding that you can’t have your cake and eat it too despite what politicians and academics say. This axiom must be accepted rather than ignored if we are to make meaningful and healthy economic reforms to our broken system. When it comes to minimum wage laws you have two choices: You can have a higher wage or lower low skilled unemployment. Choose wisely.


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