Indeed, the Minimum Wage Harms the Economy
The minimum wage is a barrier to entrance for people with little or no work experience or skills. If the minimal wage is above the worth that a person creates, you will have no incentive for the business to hire.
The 2021 Nobel Reward in Economic Sciences was awarded to David Card, Joshua Angrist, and Guido Imbens. David Card received the award for his papers (coauthored with Alan Krueger) “ Minimum Wages and Employment: A Case Study of the Fast-Food Sector in New Jersey and Pennsylvania. ”
This was used by several as scientific proof that this minimum wage does not make unemployment and should be raised. However , this is untrue, and even Card and Krueger never draw this bottom line .
Why the Minimum Income Creates Unemployment
According to Austrian economic thinking, the scientific method (isolating variables and modifying others to verify the particular possible relationships between them) is not applicable to economics, which is not a natural technology.
Instead, Austrian economics relies upon praxeology , the study of human action , which is complex and not very predictable since one can not use control variables in this particular context. It is only achievable to carry out “ pattern predictions” as F. A. Hayek explains and Jesú s Huerta de Soto mentions in this book :
These predictions are of an exclusively qualitative and theoretical nature and refer to the prediction associated with mismatches and effects of lack of social coordination caused by institutional coercion (socialism and interventionism) that is exerted on the market.
Here are some illustrations:
- The particular increase in the money supply tends to cause prices to increase, but it is not possible to know precisely what the level of price inflation is going to be. The government releases several cost inflation indices, but for many reasons , they do not represent the actual price.
- Taxes harm the economy because the government waste products resources in unnecessary and unsustainable ventures since the authorities does not operate under the profit/loss mechanism.
- Unnaturally low interest rates create malinvestments that will lead to business cycles. This particular prevents efficient resource allowance since interest rates do not represent real time preferences.
The minimum income is a barrier to admittance for people with little or no work encounter or skills. If the minimal wage is above the value that a person creates, you will have no incentive for the organization to hire.
Thus, like other government disturbance in voluntary transactions between an employee and an employer, the minimum wage harms the particular weakest party of the deal. The employee gets a lesser salary (since the company must bear these costs) and consumers ultimately pay increased prices. The cost of any enforced law or of a non-reflex transaction is always paid by the weakest party in the transaction.
The freer the market, the greater the degree associated with competition or potential competitors. Companies must invest in productivity to lower their prices. The freer the market, the better the operating conditions that companies should provide. After all, if there is a higher degree of competition or possible competition, it is easy for an additional company to attract professionals by providing working conditions that are at least a little better.
All labor costs and regulations make hiring more expensive. Thus, the higher the particular salary (generally in work opportunities that require specific training), the greater the cost of the employee, as well as the lower the chance less skilled people will start a career. In order to offset the cost, companies will simply hire the most experienced and skilled people.
It can be argued that the minimum wage in Germany is € 10. 50 each hour, and Germany has a lower unemployment price than Portugal , which has a minimum wage of € 4. 75 per hour . However , the minimum income is not the only government involvement in voluntary transactions. Based on the Heritage Foundation , Portugal is less economically free than Germany. Portugal also has a higher public debt to major domestic product ratio .
Germany is not much more economically free compared to Portugal, but Germany is certainly free enough for the Germans to be more productive than the Portuguese. Thus, a minimum income of € 10. 50 per hour in Germany does not do more damage than a minimum wage of € 4. 75 per hour in Portugal, which has a weaker economy.
Credit card and Krueger’s Case Study
Card plus Krueger’s paper analyzes the effect from the minimum wage on the fast-food industry in Philadelphia (a city split between Pennsylvania and New Jersey). In April 1992, the minimum wage in New Jersey was raised from $4. 25 per hour to $5. 05 per hour. Pennsylvania’s minimum wage did not change at the time.
Therefore , Card and Krueger chose a “ natural experiment” (mentioned in Joshua Angrist’s and Guido Imbens’s studies), a situation that occurs spontaneously but allows for an experiment. Two examples of natural experiments include the Cold War separation of East and West Indonesia and the separation of Northern and South Korea. Note that natural experiments, unlike tests in the natural sciences, cannot be controlled. They are also neither spontaneous nor natural as they failed to occur by individuals’ choices. But it is possible to observe several differences between each adjustable (the sides of each territory).
Card plus Krueger’s study examined the side of Philadelphia with a minimal wage increase (New Jersey) and the side with an unrevised minimum wage (Pennsylvania). Usually, there should be an increase in joblessness on the New Jersey side, proper? The paper shows that, in fact , there was a small increase in work. Why?
Within the conclusion, Card and Krueger state that none of the existing models explain what happened: “ Taken as a whole, these findings are difficult to explain with the standard aggressive model or with models in which employers face provide constraints (e. g., monopsony or equilibrium search models). ”
Card and Krueger also remember that fast-food prices “ improved in New Jersey relative to Pennsylvania, suggesting that much of the burden of the minimum-wage rise was passed on to consumers. ” They mentions later that will no evidence was discovered to prove that “ the rise in New Jersey’s minimum wage reduced employment at fast-food restaurants within the state. ”
The paper also shows that wages have increased to some median value within New Jersey’s wage range. Consequently , some businesses were already having to pay more than the new minimum income, and the increase did not create much difference. But this happened specifically in the fast-food industry. There is no evidence that it did not cause unemployment consist of sectors or long-term unemployment (including the fast-food market since the study was limited to a single city using information from two years after the minimal wage increase).
The Consequences of the Minimum Wage Increase in New Jersey
In economics, consideration is given to that which is seen, which which is not seen . Imagine that the government decides to develop a bridge and it boosts taxes to do so. We can see those who are employed in the construction and individuals using the bridge after it is finished. However , we do not see the people who became unemployed, did not get (or obtained smaller) raises, or the people that were unemployed and could stay away from jobs because of the tax enhance (which forcibly diverted resources that would have been used under your own accord in other ventures).
In the case of the minimum income increase in New Jersey, we observe that there was no increase in unemployment in the fast-food industry, but there are two things we do not see:
- The consumption that people had to cut due to the embrace fast food prices
- The reduced revenues consist of industries (since consumers had to pay more for fast food), which invested less within increasing productivity (i. e., because they had a harder time maintaining or lowering their own prices) and hired less or even fired some people
Of course , these are extreme extrapolations. But considering that consumers had lower disposable income, these consequences happened at least to some degree.
Conclusion
The minimum wage creates unemployment and a lack of opportunity for people with little or no work experience or skills. Only if the minimum wage was set below the productivity of all individuals, would it not result in unemployment. This is unlikely because the minimum wage would have to be low enough that it would certainly become irrelevant as a govt voting tool.
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