Wednesday, August 12, 2009

Stealing From the Poor to Buy Teenagers iPods: The Law of Unintended Consequences

So it's been over a month, I got all my vacation needs out of me in the past month and, as a diligent reader (or maybe both of them) pointed out, it's time to get this train rolling again.  Toot toot!

So next on my list of topics I will discuss economic policies and their various unintended consequences.  An unintended consequence is something that happens as a result of an otherwise well-meaning policy either in the form of a hidden cost or a change in people's behavior that was unexpected.  Today I'll discuss minimum wage.

Now minimum wage, as a concept, is rooted in altruism: you set a wage floor so that any working individual has to make at least a particular wage which is decided to be a "living wage" according to the benevolent bureaucrat who comes up with that number.  Those politicians (mostly on the left) who support it state that this is to help poor, working families make ends meet.  I think we'd all agree that that seems like a worthy goal.

And it's an easy policy to enact; politicians don't have to spend any taxpayer money and it is highly visible.  In this instance the benefits are very easy to see with a numeric value.  But what about the costs?

And that is the kicker because the costs are much less obvious, especially to those who, ostensibly, are supposed to be being helped in the first place.  One of the biggest costs is to the job sector itself: since the government is raising the wages above their market value (i.e. they are not allowing a free negotiation of wages between a willing worker and willing employer), they are forcing employers to hire fewer people.  If you have been paying attention in my essays about the Great Depression (and of course you have been) you'd see right away that a wage control actually INCREASES unemployment.  

Because firms have the freedom to choose whatever they want to pay willing workers to perform a particular job taken away from them, they exercise their freedom of choice in other ways; namely just cutting jobs and forcing what remains of their workforce to work harder to cover the loss of production.  If they can't realistically do that they then they raise the prices of their products to defray the cost.  Or, perhaps the worst scenario of all (and not at all an uncommon one) they use the minimum wage as an excuse to do both.  

So, to use an example, if you are one of three shelf-stockers at Clem's Ball-Bearing Emporium and you make minimum wage at $5.15 an hour.  The government, feeling that you are unfairly paid for your immeasurable talents of matching numbers on a box with numbers on a shelf, decides to give you a $2.10 raise.  Now Clem, the owner, has to assess his options.  If you and your two coworkers worked there full-time, Clem is now shelling out just over another $1,000 a month for the same amount of work.  That might not seem like much but if Clem is a good manager he is already operating at the margin and squeezing every dollar for what it is worth to undercut his competition.  

Since Clem has to pay you more he has to find some way to make up that $1,000  He will either have to raise the prices on ball-bearings after assessing his monthly revenue (which might not be a good idea if his competition lays off workers to keep their prices down) or he will have to decide which of the three of you he has to put out of a job.  If he lays one of you off, he ends up saving himself over $1,100 a month in addition to the costs of maintaining you on the payroll.  But he will have to push the two remaining guys even more to make up the work, or even spend valuable amounts of his own time doing it as well, instead of devoting more time doing the more important and essential things involved in running a business.  

Now, to be fair, minimum wage isn't all that powerful of tool for helping out poor people (or hurting businesses) in the grand scheme of things (but it sure looks good for politicians seeking reelection) since minimum wage barely keeps pace with inflation, but there are more insidious costs involved.

For one thing, over 90% of the people making minimum wage aren't even the sole sources of income for their households; most of these jobs are held by people with part-time side jobs and teenagers still living with their parents.  That fact kind of takes the whole "we're doing this for poor people" claim right out of the equation.  Secondly, businesses use minimum wage increases as an excuse to raise their prices anyway and, since most of those jobs are in service and retail industries like Wal-Mart or McDonald's), the people on the lowest rungs of the income ladder--who weren't actually propped up by the change of minimum wage in the first place--actually shoulder more of a cost than they received in benefits.  Ouch!

So, as you can see, the Law of Unintended Consequences rears it's ugly head in a fashion that not only doesn't actually benefit the people it was designed to benefit, but actually does them more HARM overall.  I wonder how many votes these politicians would get if they just told the truth and said "I'm proposing that we make goods more expensive for poor people so teenaged kids have more money for iPods"?  I'm guessing not very many.


  1. For one thing, over 90% of the people making minimum wage are even the sole sources of income for their households

    Did you mean "aren't"?

    Interesting post.

  2. You are correct. I'll fix that. Thanks.