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Let the Data Speak: The Truth Behind Minimum Wage Laws
By Steve H. Hanke of Cato.
"President Obama set the chattering classes abuzz after his recent
unilateral announcement to raise the minimum wage for newly hired
Federal contract workers. During his State of the Union address in
January, he sang the praises for his decision, saying that “It’s good
for the economy; it’s good for America.” As the worldwide economic slump
drags on, the political drumbeat to either introduce minimum wage laws
(read: Germany) or increase the minimums in countries where these laws
exist — such as Indonesia — is becoming deafening. Yet the glowing
claims about minimum wage laws don’t pass the most basic economic tests.
Just look at the data from Europe (see the accompanying chart).
There are seven European Union (E.U.) countries in which no minimum
wage is mandated (Austria, Cyprus, Denmark, Finland, Germany, Italy, and
Sweden). If we compare the levels of unemployment in these countries
with E.U. countries that impose a minimum wage, the results are clear. A
minimum wage leads to higher levels of unemployment. In the 21
countries with a minimum wage, the average country has an unemployment
rate of 11.8%. Whereas, the average unemployment rate in the seven
countries without mandated minimum wages is about one third lower — at
7.9%.
This point is even more pronounced when we look at rates of
unemployment among the E.U.’s youth — defined as those younger than 25
years of age (see the accompanying chart).
In the twenty-one E.U. countries where there are minimum wage laws,
27.7% of the youth demographic — more than one in four young adults —
was unemployed in 2012. This is considerably higher than the youth
unemployment rate in the seven E.U. countries without minimum wage laws —
19.5% in 2012 — a gap that has only widened since the Lehman Brothers
collapse in 2008.
So, minimum wage laws — while advertised under the banner of social
justice — do not live up to the claims made by those who tout them. They
do not lift low wage earners to a so-called “social minimum”. Indeed,
minimum wage laws — imposed at the levels employed in Europe — push a
considerable number of people into unemployment. And, unless those newly
unemployed qualify for government assistance (read: welfare), they will
sink below, or further below, the social minimum.
As Nobelist Milton Friedman correctly quipped, “A minimum wage law
is, in reality, a law that makes it illegal for an employer to hire a
person with limited skills.”
Dr. Jens Weidmann, President of Germany’s Bundesbank, must have heard
Prof. Friedman and looked at these European data before he took on
Chancellor Angela Merkel for proposing the introduction of a minimum
wage law in Germany. In short, Dr. Weidmann said that this would damage
Germany’s labor market and be a German job killer. He is right.
And, executives surveyed in the recently released Duke University/CFO
Magazine Global Business Outlook Survey agree, too. Indeed, Chief
Financial Officers from around the world were interviewed and a
significant number of them concurred: a minimum wage increase in the
United States –from the current $7.25/hour to President Obama’s proposed
$10.10/hour — would kill U.S. jobs. The accompanying table shows what
the CFOs had to say.
Perhaps, Prof. Friedman said it best when he concluded that “The real
tragedy of minimum wage laws is that they are supported by well-meaning
groups who want to reduce poverty. But the people who are hurt most by
high minimums are the most poverty stricken.”
High mandated minimum wages will throw people out of work and onto
the welfare rolls in cases where unemployment benefits exist. When it
comes to welfare payments, they obey the laws of economics, too. Indeed,
if something — like unemployment — is subsidized, more of it will be
produced. When the data on unemployment benefits speak, they tell us
that if the unemployed receive unemployment benefits, the chances that
they will become employed are reduced. Those data also show that the
probability of an unemployed worker finding employment increases
dramatically the closer an unemployed worker comes to the termination
date for receipt of his unemployment benefits. In short, when the
prospect of losing welfare benefits raises its head, unemployed workers
magically tend to find work.
The most important lesson to take away from allowing the minimum wage
and unemployment benefit data to talk is that abstract notions of what
is right, good and just should be examined from a concrete, operational
point of view. A dose of reality is most edifying."
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