Raymond Richman - Jesse Richman - Howard Richman
Richmans' Trade and Taxes Blog
The Current Minimum Wage May Cost Teenagers and Blacks More than $29 Billion!
Economists are divided on how much unemployment the minimum wage causes. About 70% or more of economists believe that a minimum wage decreases the demand for workers, especially unskilled workers. The demand for any worker depends on what the employer believes that hiring him would be worth to him. No employer will hire a worker unless he believes the worker will contribute as much value as the worker costs. Who is hurt the most? Teenagers and the unskilled who are unable to find jobs and those who patronize fast food restaurants, the less expensive hotels, and businesses catering to customers of the low and moderate income classes who are forced to pay higher prices for their necessities.
The unemployment statistics speak for themselves. Compare the unemployment rates of teenagers and the rest of those in the civilian labor force. The unemployment rate during the first quarter of 2014 was 6.5 percent for those 20 years of age and older but 20.9 percent for those aged 16 to 19. White teenagers had an unemployment rate of 20.9 percent, black teenagers 34.5 percent, Latin teenagers 24.4 percent and Asian 15.4 percent. The minimum wage laws affect blacks more than any group. Even in the population over 20 years of age, the black rate of unemployment was 11.5 percent compared to whites 5.7 percent. It could be argued that the minimum wage laws affect blacks more than any other group.
Many classes of workers are not affected by a minimum wage law. Skilled workers produce a lot of value whereas unskilled workers produce a lesser amount of value. The wages of skilled are probably not affected at all by a minimum wage law.
Every class of labor is subject to the law of supply and demand, represented as a downward sloping demand curve and a supply curve that horizontal upward. The high wages of skilled labor is attributable to the fact that skilled labor is relatively scarce. How does a skilled laborer acquire his or her skills? Some by education and training, by schooling and technical education. Some by experience, by skills obtained by working on-the-job. The unskilled acquire skills on-the-job by training, observation and experience. Employers train unskilled workers to do some task that has value for them. The unskilled worker acquires a skill. Those who excel in the task are likely to be rewarded by training to do a job that creates even more value and is rewarded by increased pay. The process continues. Many foremen and managers started as unskilled workers. Workers have an incentive to acquire greater and greater skills.
All employers hire a variety of skills from mangers and skilled technicians to employees that do relatively simple tasks like cleaning up. Raising the minimum wage will cause all employers to economize on relatively unskilled workers.
Getting a first job is very important to an individual’s skill development. If one has to pay an unskilled worker an amount of money that exceeds the expected skill he is expected to acquire by on-the-job training in a reasonable time on the job, he will not hire. If wages of unskilled labor are very high, employers will be very reluctant to experiment and to employ additional workers whereas if wages are lower, employers will be more willing to take a chance on hiring.
Some employers can more easily pass on increased wage costs to consumers in the form of higher prices. Employers with a greater degree of monopoly power are more likely to be able to pass the increased cost of wages to their customers, whereas employers in highly competitive industries will be less able to pass the burden of increased costs to their customers.
If all employers in highly competitive industries have to pay the increased cost of a minimum wage, then customers of even the competitive industries will have to bear the burden in the form of increased prices. But that will affect the competition between products. For example, the fast food industry and restaurants and hotels employ large numbers of unskilled workers, training them to do tasks like serving, cleaning, and so on. Raising the minimum wage will raise their costs and depending on the wealth of their clientele, they will be affected differently. Expensive restaurants and hotels will be affected little by a small rise in costs of relatively unskilled employees, whose pay is a small proportion of the price of their final product. Fast food and less-expensive restaurants will lose customers as some of their customers eat out less frequently. They will become less profitable and some may even close.
The minimum wage laws favor the rich and hurt the poor. That is why one hears so little protest for the chambers of commerce and from the labor unions. The latter are the principal proponents of minimum wage laws since they want to avoid competition from lesser paid workers.
A minimum wage of $5 is an annual wage of more than $10,000. If an employer cannot expect $10,000 of value-added, they will no hire the unskilled. When the minimum wage is $5, the employment of a teenager thus adds $10,000 per year to family income. Suppose reducing the minimum wage to $5/hour, 50% would have been employed. If only 50% of some 5,785,000 were employed during the 1st quarter of 2014, 2,891,000 would have been employed and their annual earnings would have amounted to $28.9 billion dollars. One can conclude that the national minimum wage of over $7.25 per hour has cost teen-agers nearly $29 billion and raising it to $10.00, will cost them even more.
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