The unintended deleterious effects of high minimum wages

15 Feb

Economist Walter E. Williams once illustrated the effects of minimum wages like this (he goes through the empirical evidence in his book The State Against Blacks).  Suppose you want steak for dinner and head out to the local steakhouse.  The waiter gives you a menu and you have two steaks from which to choose, the chuck steak and the filet mignon .  Now, you prefer the filet mignon, of course, but figure you might go with the chuck steak given a lower price.  Now, suppose that the steakhouse decides to run a special, such that the filet mignon is roughly the same price as the chuck steak, not by value but by decree.  Which do you choose?  Which do you choose every time?  If the filet mignon represents high-skilled workers, the chuck steak represents low-skilled workers, and you represent an employer, then maybe you can see why most economists have misgivings about the minimum wage law.  A law which raises the minimum wage (wage being the price of labor) of low-skilled workers to that of high-skilled workers renders low-skilled workers less employable.  Whereas before, like the chuck steak, they could bargain for the job by offering to work for less (“I’m not as good a worker, but I’m cheaper!”), the new law neuters that argument.  Hence, economists argue, raises in the minimum wage tend to increase unemployment among the least skilled workers in society (disproportionately the young and racial minorities).  Nobel Prize winning economist Milton Friedman explains:

Just FYI: The current (January) teenage unemployment rate was 23.4%, and 37.8% for black teenagers.

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