We are treated to ongoing discussions and demands of increases in the minimum wage about every year. Some people never stop talking about it and politicians LOVE to use this as both a demonstration of their deep compassion for the poor and a distraction from the realities of their character and intentions.
Those who don't understand free market economics are always ready prey for these purveyors of pooh, so I thought it might be a good idea to shed some light on this issue with a BASIC discussion of the economics of a government-imposed minimum wage.
Free Markets
We once lived in a Constitutional Republic where the federal government was restrained by a Constitution which granted it limited and enumerated powers. This means the State was not allowed to tinker in the every-day lives of its citizens. But the State has its ways of deceiving people and amassing power to itself over time. One of these methods is to keep people ignorant of the concept of a free market and injecting itself into our dealings with price controls under the pretense of compassion for the down-trodden.
In a free market, every individual has the right to engage in a trade with any other individual in such a manner that both parties agree to the transaction freely. This likewise applies to groups or organizations who wish to exchange goods, services, or money as they see fit.
If "Bob" makes a product that "Pete" likes, the two of them can discuss options for the transfer of the product from Bob to Pete. Bob provides a SUPPLY, and Pete has a DEMAND for the product. When Pete offers Bob something he values more than his product--money, for example--Bob will exchange his product for the PRICE Pete is willing to pay.
When we expand Bob and Pete's situation to lots of people, we can see how Bob and others like him would want to make a LOT of units of their products when there are a lot of people willing to pay a high price for it. Pete and others will be more eager to buy more units of the products if the price is lower. This relationship is shown on this graph that we've all likely seen at some point:
Price is on the vertical axis of this graph and quantity on the horizontal axis refers to the number of products being exchanged at a given price.
To recap, notice how people--the Bobs, in this case--will naturally want to supply more products when the price is higher (the SUPPLY curve). People--the Petes, in this case--will naturally want to purchase more of the Bobs' stuff at a lower price (the DEMAND curve).
But things work best where the two curves intersect--Equilibrium. That is the point where Bob and other producers can generate just the number of products at the price people demand the same amount of those products. We also call this the "Market Price."
No, this typically is never easily or perfectly achieved in an economy but, left to itself--when people are left alone to make their own choices about what they will buy and from whom, this equilibrium can be nearly achieved.
What about Minimum Wage?!
I know. I promised to talk about the Minimum Wage. Here it is. When it comes to jobs, the product we are selling--or SUPPLYing-- is our labor. The units we're talking about are hours worked or jobs performed--the quantity of labor provided, and the price would be the wage or salary.
So, using Bob and Pete again as our example, we would say Bob is willing to trade his time, talents and a portion of his limited time on earth (say, one hour) for $5.00. Pete has work that has to be done that he is willing to pay $5.00 for. He and Bob agree that for every hour of Bob's time spent working for Pete, he will receive $5.00. (Yes, they could also agree to a "premium" for hours spent in excess of a certain amount--overtime, so to speak--but I said I would keep this simple for now.)
Expanding this to more people again, we can see that people will want to supply more of their time to jobs at a higher price, and people in search of labor will want to hire more people as their price--or wage/salary--is lower.
People will naturally gravitate toward the equilibrium, left to themselves. Now, suppose the equilibrium point is at $5.00 per hour for a particular position. (It is a task that requires little training or skill and just about anyone can do it. People who fit that description will accept the task for $5.00 per hour.)
But what happens when the State--the government--comes with its big heart full of compassion for the poor, unskilled labor provider in this picture?
Notice the line across the image here. That would represent a government-imposed minimum wage.
That price for Bob's labor is higher than the equilibrium point. It crosses the Demand curve and the Supply curve at different points of quantity. This means that those who need hours of work performed can't afford as much at this imposed price, so they will cut back on hiring or find cheaper methods of production to replace the workers whose hours they cannot afford to buy.
It also means that those with time to offer in labor will rush to get the remaining work. For example, someone with more skill, training and education who would qualify for work that pays more will gladly accept the less demanding labor in the unskilled position at this higher wage/salary and push the more unskilled workers aside to take the remaining work at this price level.
The result is, of course, less employment for the target of the government's compassion.
So, here's the really evil aspect of this on-going discussion. The politician is fueled and empowered by the public perception of existing problems and the perception that the politician has solutions.
As the statist, Rahm Emanuel, was quoted as saying when B. Hussein first began his reign of terror: "Never let a crisis go to waste." This is the mantra of the statist politician. When the public is kept in a perceived state of crisis, they are more willing to accept the interventions and machinations of the State in their behalf. In a crisis, people willingly--even eagerly--surrender their liberties for the promise of greater security.
What greater individual crisis can you imagine than financial ruin that comes from under- or unemployment?
When Bob is faced with this situation--he's healthy, strong, able, and willing to work. But the job he's qualified for doesn't pay enough to meet his bills. He's approached by the compassionate politician with grand promises of earning a "living wage" through a government-imposed minimum wage. Sounds great to Bob. He'll make more money, right?
Wrong. He'll likely lose the only job he's currently qualified for because of what is described above. Then, in his heightened state of crisis he becomes even more susceptible to the maneuverings of the politician. Crisis increased, the politician wins, Bob loses.
But wait. There's more! When you spread the effects of the government tinkering with wages across the entire economy, everyone pays a price. The Equilibrium is disrupted across all industries and a false pricing level is put in place for almost all workers in it. More skilled workers are drawn into jobs requiring less skill for higher pay, lower skilled workers are pushed into still lower-skill work or our of the work force entirely and a disruptive inefficiency is introduced into the entire system. Large numbers of people are over-compensated for the real value of the labor performed and skill levels of the employees are mismatched to the jobs and tasks performed.
The effects this massive inefficiency ripple throughout the economy and it is impossible to measure the full impact.
Now, this applies to every instance where the State intervenes to establish pricing controls of any kind on the economy. The politicians create havoc, a crisis is perceived, the people become more malleable, and the power of the State expands at the expense of the people.
The solution is a simple concept to understand. Remove the heavy hand of the State from the picture and allow the market to find the equilibrium point for each job. Allow people the liberty to innovate and grow to increase their own value in that free marketplace and everyone benefits.
THIS is the genius of the free market that has benefited the entire world. As Walter Williams pointed out (paraphrasing): "[For the entire history of the world until the United States and free markets were introduced, the only way to acquire wealth was to rob, plunder, invade, and kill other people. When the United States and free markets were introduced, people were enabled--for the first time--to achieve vast wealth by serving other people.]"
In a FREE market, the value of labor is limited only by the ambition and drive of the laborer. When the State determines the price of anything--including our labor--it is destructive to us all, and an attack on liberty.
Those who don't understand free market economics are always ready prey for these purveyors of pooh, so I thought it might be a good idea to shed some light on this issue with a BASIC discussion of the economics of a government-imposed minimum wage.
Free Markets
We once lived in a Constitutional Republic where the federal government was restrained by a Constitution which granted it limited and enumerated powers. This means the State was not allowed to tinker in the every-day lives of its citizens. But the State has its ways of deceiving people and amassing power to itself over time. One of these methods is to keep people ignorant of the concept of a free market and injecting itself into our dealings with price controls under the pretense of compassion for the down-trodden.
In a free market, every individual has the right to engage in a trade with any other individual in such a manner that both parties agree to the transaction freely. This likewise applies to groups or organizations who wish to exchange goods, services, or money as they see fit.
If "Bob" makes a product that "Pete" likes, the two of them can discuss options for the transfer of the product from Bob to Pete. Bob provides a SUPPLY, and Pete has a DEMAND for the product. When Pete offers Bob something he values more than his product--money, for example--Bob will exchange his product for the PRICE Pete is willing to pay.
When we expand Bob and Pete's situation to lots of people, we can see how Bob and others like him would want to make a LOT of units of their products when there are a lot of people willing to pay a high price for it. Pete and others will be more eager to buy more units of the products if the price is lower. This relationship is shown on this graph that we've all likely seen at some point:
To recap, notice how people--the Bobs, in this case--will naturally want to supply more products when the price is higher (the SUPPLY curve). People--the Petes, in this case--will naturally want to purchase more of the Bobs' stuff at a lower price (the DEMAND curve).
But things work best where the two curves intersect--Equilibrium. That is the point where Bob and other producers can generate just the number of products at the price people demand the same amount of those products. We also call this the "Market Price."
No, this typically is never easily or perfectly achieved in an economy but, left to itself--when people are left alone to make their own choices about what they will buy and from whom, this equilibrium can be nearly achieved.
What about Minimum Wage?!
I know. I promised to talk about the Minimum Wage. Here it is. When it comes to jobs, the product we are selling--or SUPPLYing-- is our labor. The units we're talking about are hours worked or jobs performed--the quantity of labor provided, and the price would be the wage or salary.
So, using Bob and Pete again as our example, we would say Bob is willing to trade his time, talents and a portion of his limited time on earth (say, one hour) for $5.00. Pete has work that has to be done that he is willing to pay $5.00 for. He and Bob agree that for every hour of Bob's time spent working for Pete, he will receive $5.00. (Yes, they could also agree to a "premium" for hours spent in excess of a certain amount--overtime, so to speak--but I said I would keep this simple for now.)
People will naturally gravitate toward the equilibrium, left to themselves. Now, suppose the equilibrium point is at $5.00 per hour for a particular position. (It is a task that requires little training or skill and just about anyone can do it. People who fit that description will accept the task for $5.00 per hour.)
But what happens when the State--the government--comes with its big heart full of compassion for the poor, unskilled labor provider in this picture?
Notice the line across the image here. That would represent a government-imposed minimum wage. That price for Bob's labor is higher than the equilibrium point. It crosses the Demand curve and the Supply curve at different points of quantity. This means that those who need hours of work performed can't afford as much at this imposed price, so they will cut back on hiring or find cheaper methods of production to replace the workers whose hours they cannot afford to buy.
It also means that those with time to offer in labor will rush to get the remaining work. For example, someone with more skill, training and education who would qualify for work that pays more will gladly accept the less demanding labor in the unskilled position at this higher wage/salary and push the more unskilled workers aside to take the remaining work at this price level.
The result is, of course, less employment for the target of the government's compassion.
So, here's the really evil aspect of this on-going discussion. The politician is fueled and empowered by the public perception of existing problems and the perception that the politician has solutions.
As the statist, Rahm Emanuel, was quoted as saying when B. Hussein first began his reign of terror: "Never let a crisis go to waste." This is the mantra of the statist politician. When the public is kept in a perceived state of crisis, they are more willing to accept the interventions and machinations of the State in their behalf. In a crisis, people willingly--even eagerly--surrender their liberties for the promise of greater security.
What greater individual crisis can you imagine than financial ruin that comes from under- or unemployment?
When Bob is faced with this situation--he's healthy, strong, able, and willing to work. But the job he's qualified for doesn't pay enough to meet his bills. He's approached by the compassionate politician with grand promises of earning a "living wage" through a government-imposed minimum wage. Sounds great to Bob. He'll make more money, right?
Wrong. He'll likely lose the only job he's currently qualified for because of what is described above. Then, in his heightened state of crisis he becomes even more susceptible to the maneuverings of the politician. Crisis increased, the politician wins, Bob loses.
But wait. There's more! When you spread the effects of the government tinkering with wages across the entire economy, everyone pays a price. The Equilibrium is disrupted across all industries and a false pricing level is put in place for almost all workers in it. More skilled workers are drawn into jobs requiring less skill for higher pay, lower skilled workers are pushed into still lower-skill work or our of the work force entirely and a disruptive inefficiency is introduced into the entire system. Large numbers of people are over-compensated for the real value of the labor performed and skill levels of the employees are mismatched to the jobs and tasks performed.
The effects this massive inefficiency ripple throughout the economy and it is impossible to measure the full impact.
Now, this applies to every instance where the State intervenes to establish pricing controls of any kind on the economy. The politicians create havoc, a crisis is perceived, the people become more malleable, and the power of the State expands at the expense of the people.
The solution is a simple concept to understand. Remove the heavy hand of the State from the picture and allow the market to find the equilibrium point for each job. Allow people the liberty to innovate and grow to increase their own value in that free marketplace and everyone benefits.
THIS is the genius of the free market that has benefited the entire world. As Walter Williams pointed out (paraphrasing): "[For the entire history of the world until the United States and free markets were introduced, the only way to acquire wealth was to rob, plunder, invade, and kill other people. When the United States and free markets were introduced, people were enabled--for the first time--to achieve vast wealth by serving other people.]"
In a FREE market, the value of labor is limited only by the ambition and drive of the laborer. When the State determines the price of anything--including our labor--it is destructive to us all, and an attack on liberty.
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