We have talked before about how price floors are detrimental for an economy; they create a surplus of a particular product, they artificially limit demand, and they lead to a lower standard of living. There are different types of price floors that take different names, but no matter how good politicians try to make their price floors sound, they will always be, fundamentally, price floors. Here, we will talk about the minimum wage, and how it has damaged the market for labor in this country, and has led to a decreased standard of living since its initial inception in the early 20th century.
The minimum wage began as a New Deal policy in 1938, as FDR and his fellow Democrats felt that the policy would help ease the depression to a halt. The wage began at $0.25 an hour, which was still considered a very low amount at the time, but desperate times called for desperate measures. It went about how anyone who is fluent in the effects of price floors can imagine; it stifled the labor market, increased poverty, and lowered standards of living. There are several reasons why this happened, all of which we will go over in this article.
The first reason this policy failed to fix the problem of rising poverty levels in the United States is because it stripped both employers and employees of their liberty of contract. In other words, the minimum wage prevented the employer from paying any employee less than $0.25 an hour, but more importantly, it prevented workers from providing their labor for any less than $0.25 an hour. Neither employer nor employee were able to negotiate without government supervision, and it made a difference, especially as the depression was made worse by other New Deal policies.
So, what are the short-term consequences of introducing a minimum wage? From data collected at the time and personal experiences from our elderly, finding a job in the private market became increasingly difficult. Unemployment in the private market skyrocketed, while politicians at the time rejoiced because of increasing government payrolls to counteract the problems they created.
This occurred because businesses could no longer afford to hire workers at the set price floor, and the unemployed were left to find someone else who could hire them for that amount. However, the workers who were laboring for less than $0.25 an hour before the minimum wage was enacted were paid that amount because their labor was simply not worth any more. In other words, the worker could not provide more than $0.25 an hour’s worth of profits, meaning the employer would lose money if they were to pay the employee any more than they were. This being true, the newly unemployed in America were barred from ever finding employment again in the private market, especially because of the heightening depression.
Unemployment is simply a short-term effect of a minimum wage. It could be considered a long-term effect as well, as unemployment would continue to rise until the market reached a new employment equilibrium. Another long-term effect of a price floor on labor is rising poverty levels. This phenomenon can be explained by the rising unemployment numbers. If people are unable to find work, they find themselves in poverty, not being able to sufficiently house, clothe, or feed themselves because of a lack of disposable income.
The federal government has tried to fix poverty in America, the most prominent example being President Lyndon B. Johnson’s “War on Poverty.” The Johnson administration set up unemployment benefits, welfare and government benefits, and finally, a substantial increase to the minimum wage in 1968. The idea was that all of these policies put together would end poverty in America, and lead to a higher standard of living and an overall better nation.
What Johnson and his fellow Keynesians failed to look at is the other side of the equation. If they increased the minimum wage, there would be massive layoffs because employers would have to adapt to the higher labor costs. Johnson’s other policies of government stimulus made life harder for those who actually kept their jobs, as they paid more in taxes and probably received pay cut to resemble the new costs of the employer. Johnson’s policies also incentivized unemployment, as unemployment benefit and welfare recipients could make a living not working at all. Now, employees were no longer working for their wage at all; they were working for the difference between their wage and the benefits they could get if they were unemployed.
Poverty increased under Johnson because of increased unemployment that continued into the 70’s, which leads to the third long-term effect of a lower standard of living. Now that wages have been forced upwards by overzealous politicians, businesses are forced to raise their prices by a proportional amount. Inflation occurs, and an employee who is making above the minimum wage cannot purchase the same amount of goods as they could before the policy was enacted. Even though other things were going on that had terrible effects on the economy, we can see the three effects of an increase in the minimum wage during the recessions of the 1970’s.
The minimum wage cannot exist in a free-market economy for the simple reason that the market is no longer free. A sector of the economy has been regulated, and as is the case with any regulation, economic losses are inevitable. Ever since the introduction of a price floor to the labor market was introduced, it has had terrible effects on the people it assured us it was out to protect: our young people. The minimum wage hurts the poorest in our society, and for some reason, the left continues to defend it without knowing the truth behind it.