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Monday, November 21, 2005

Job creation or not

As Bret explained in this post, high enough levels of taxation can limit paying work that would otherwise be available to people. Another way of depriving people of jobs is through regulations. Thomas Sowell offers up this article which presents information which I'm pretty sure most people are unaware of...

Let us go back a few generations in the United States. We need not speculate about racial discrimination because it was openly spelled out in laws in the Southern states, where most blacks lived, and was not unknown in the North.

Yet in the late 1940s, the unemployment rate among young black men was not only far lower than it is today but was not very different from unemployment rates among young whites the same ages. Every census from 1890 through 1930 showed labor force participation rates for blacks to be as high as, or higher than, labor force participation rates among whites.

People who are less in demand -- whether because of inexperience, lower skills, or race -- are just as employable at lower pay rates as people who are in high demand are at higher pay rates. That is why blacks were just as able to find jobs as whites were, prior to the decade of the 1930s and why a serious gap in unemployment between black teenagers and white teenagers opened up only after 1950.

Prior to the decade of the 1930s, the wages of inexperienced and unskilled labor were determined by supply and demand. There was no federal minimum wage law and labor unions did not usually organize inexperienced and unskilled workers. That is why such workers were able to find jobs, just like everyone else, even when these were black workers in an era of open discrimination.

The first federal minimum wage law, the Davis-Bacon Act of 1931, was passed in part explicitly to prevent black construction workers from "taking jobs" from white construction workers by working for lower wages. It was not meant to protect black workers from "exploitation" but to protect white workers from competition.

Even aside from a racial context, minimum wage laws in countries around the world protect higher-paid workers from the competition of lower paid workers.

Often the higher-paid workers are older, more experienced, more skilled or more unionized. But many goods and services can be produced with either many lower skilled workers or fewer higher skilled workers, as well as with more capital and less labor or vice-versa. Employers' choices depend on the relative costs.

The net economic effect of minimum wage laws is to make less skilled, less experienced, or otherwise less desired workers more expensive -- thereby pricing many of them out of jobs. Large disparities in unemployment rates between the young and the mature, the skilled and the unskilled, and between different racial groups have been common consequences of minimum wage laws.

That is their effect whether the particular minimum wage law applies to one sector of the economy like the Davis-Bacon Act, to the whole economy like the Fair Labor Standards Act of 1938 or to particular local communities like so-called "living wage" laws and policies today.

The full effect of the Fair Labor Standards Act of 1938 was postponed by the wartime inflation of the 1940s, which raised wages above the level specified in the Act. Amendments to raise the minimum wage began in 1950 -- and so did the widening racial differential in unemployment, especially for young black men.

There have been some studies implying that minimum wage laws are not that bad... but upon careful examination they have been found to be, shall we say, garbage. Wage, benefit mandates and other labor market regulations might sometimes achieve the stated good effects. Often they do not and they always come at a price.


Oroborous said...

While minimum-wage laws do lower employment, the effect isn't large, or at least it isn't long-lasting.

In Oct. '05, the total civilian labor force was 150,079,000, of whom 142,646,000 were employed.

If we add in the 1,400,000 people who were willing to work, under certain conditions, but who were not actively looking for work, for various reasons, we get 142,646,000 / 150,079,000 + 1,400,000 = 94% of ALL people who are willing to work, (discouraged or not), have at least one job.

Since we know that 2% - 3% of the total labor force is going to be unemployed at any given time, due to personal reasons and job losses unrelated to the overall economic trend, and that there are 7,082,000 teens aged 16 - 19 included in the total labor force numbers, we can see that, at most, there are 4,800,000 adults who would be willing to work, but who don't currently have a job.

Thus, the bottom-line practical, (not official), unemployment rate among adults is 3.3%, whereas the rate among those 16 - 19 is over 15%.

So, although the minimum wage does appear to hurt those with no skills or experience, the effect is typically short term.

Once a person acquires some experience or training, they appear to have little problem finding a job that pays above minimum wage.

Bret said...


I tend to agree that at the current moment in time, minimum wages are probably only slightly detrimental.

However, as you point out, we have pretty full employment at the moment. Could be a little higher, but not a lot.

What if, per your post at the Daily Duck, we actually do have a deeper recession with significantly higher unemployment due to the bursting of the housing bubble? If that were to happen, I think the impact of regulations such as the minimum wage and other labor market restrictions might hurt the unskilled and unexperienced much more than they do now.

Howard said...

I'll agree with the validity of both previous comments. Let me suggest that the legacy of these regulations may have contributed to altering attitudes about work... one of many factors in a cultural change. Also, even if the overall effect is not large, changes at the margin are important. Think of the irony of who is most effected.

Oroborous said...

If American society simply mandated that workers be paid above a certain amount, and did nothing for the unemployed, then I'd be much more critical of minimum wage laws.

However, we have a pretty extensive support net, (despite the opinions of our going-broke Euro colleagues), with unemployment payments, housing subsidies, free medical care, food vouchers, and many training programmes.

Any adult who cannot be employed typically doesn't want to be employed, at least not on the employers' terms.
(Note that I have little sympathy for those who will not move to find work. While I understand that particular areas have personal or economic value beyond the monetary, I also think that survival must come first).

A deep recession would cause the minimum wage to result in deep job losses among the young and poorly-skilled, but not for long, if history is any guide, (the GNP during the Great Depression recovered nominally by 1933, and per-capita GNP matched '29 in '39), and in any case the unemployed won't starve.

My position is that fewer people are harmed, in the long run, by protecting everyone from extreme wage exploitation, and simply subsidizing those who cannot find work.
Without a min. wage, management and capital have too much leverage over labor.

Hey Skipper said...


It isn't possible to have widespread wage exploitation in a market economy, any more than it is possible to have widespread price exploitation on any other commodity.

It makes no more sense to think you somehow avoid the law of supply & demand with labor than with anything else.

Bret said...

Oroborous wrote two comments that seem to me to be in conflict:

1. "Without a min. wage, management and capital have too much leverage over labor."

2. "Once a person acquires some experience or training, they appear to have little problem finding a job that pays above minimum wage."

If, after some experience or training, people can find jobs above the minimum wage, how can management and capital have too much leverage over labor without a minimum wage?

It seems to me that the primary detriment of the minimum wage is that it might prevent the inexperienced and untrained from getting that first job that gets them on a career path.

Oroborous said...


But labor is different from most commodities, in that it's not easily transportable.

People build lives wherever they live, and are reluctant to uproot them at a moment's notice, or for a few dollars more.

While people will eventually leave an area with NO jobs, and places that have a labor shortage will get an influx of job-seekers, it happens slowly, and incompletely.

If labor truly was fungible, then there ought not be any wage differentials across the U.S., since workers would flock to anyplace that had a demand for labor, and leave places where demand had slackened.