Pricing the poor out of a job

It is too often true that well-intentioned people prescribe what they believe are good remedies for the economically deprived, without knowing much about economics. The consequences are devastating.

Case in point: the minimum wage.

Minimum wage activists think they're helping the poorest of the poor. In fact, they're pricing them out of the job market. The activists shouldn't get kudos. They should get catcalls.

Earlier this month, the Senate defeated an amendment by Sen. Ted Kennedy to raise the national minimum wage to $7.25 per hour. So those whose skills aren't worth $7.25 per hour got a reprieve. But that's not the case in some venues. Many states and localities have their own minimum wage that's well above the national rate $5.15 per hour. Though there are some winners in this arrangement, there are lots of losers.

When the minimum wage rises, employers tend to hire or retain more productive people. Wanting to get their money's worth, employers are more selective in whom they hire, substituting higher-skilled workers for lower-skilled workers. When choosing between an easy-to-train high school honor student and a semi-literate welfare recipient, it's a no-brainer.

This helps explain why there is such a big underclass in America. The average unemployment rate for those without a high-school diploma is much higher than that of more educated people; currently it's 7.8 percent, compared with 4.9 percent for those with high school degrees and 2.4 percent for those with college degrees. For black teens (16-19 years old), the unemployment rate is a whopping 31.5 percent.

Businesses don't hire people out of the charity motive. They hire people out of the profit motive. An employer will only hire someone if that someone's work effort is worth more than the amount he or she gets paid.

If an employee can sell $250 worth of hot dogs per week, and earns a minimum wage of $225 per week, then the employer has come out ahead. But if the minimum wage is raised to $275 per week, then to the employer, it would make no economic sense to retain him as an employee. If he was poor before, he's a lot poorer now.

Thanks to Charlie's abundant energy while on the job, and because of Maureen's knack for selling, they're still employable. But John's performance is mediocre, and the fact that his reading skills aren't good doesn't help. With the current minimum wage, despite his weaknesses he is still able to produce somewhat more than what he gets paid. If the minimum wage rises, that will no longer be the case.

Echoing a theme of Todd Buchholz's book, Bringing the Jobs Home: How the Left Created the Outsourcing Crisis, and How We Can Fix It, raising the minimum wage also encourages outsourcing to lower-wage overseas locations.

Just ask the folks at the Harvard Crimson newspaper. A few years ago it strongly supported Harvard students' campaign to institute a $10.25-an-hour minimum wage, or "living wage," on campus. But then the newspaper did something curious. To construct a large archive of its back issues, it turned to low-wage workers in Cambodia to type in the text. Said the then-Crimson president, "You can't employ someone in North America to do this kind of job at this cost." Wide-eyed idealism came face to face with economic reality.

Instead of trying to artificially set higher wages through legislation - which inevitably results in unemployment and other distortions - a much better alternative is to increase the demand for workers through encouraging the creation of more businesses. When demand outpaces supply, prices (wages) rise. So a more business-friendly environment is what's needed.

Employers can be told what to pay, but they cannot be told whom to hire. Unemployment of the lowest-skilled people is the result. That's what the combination of good intentions and economic illiteracy has wrought.