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catallaxy in technical exile

The debacle of minimum wages

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A helpful piece to explain why minimum wage laws do more harm than good. Rather an important thing to explain, given that public opinion runs strongly in favour of minimum wages and no party at present would dare to adopt a sensible position.

Minimum wage laws set legal minimums for the hourly wages paid to certain groups of workers. Invented in Australia and New Zealand with the admirable purpose of guaranteeing a minimum standard of living for unskilled workers, they have been widely acclaimed as both the bulwark protecting workers from exploitation by employers and as a major weapon in the war on poverty.

Unfortunately, neither laudable intentions nor widespread support can alter one simple fact: although minimum wage laws can set wages, they cannot guarantee jobs. In reality, minimum wage laws place additional obstacles in the path of the most unskilled workers who are struggling to reach the lowest rungs of the economic ladder. According to a 1978 article in American Economic Review, the American Economic Association’s main journal, fully 90 percent of the economists surveyed agreed that the minimum wage increases unemployment among low-skilled workers. It also reduces the on-the-job training offered by employers and shrinks the number of positions offering fringe benefits. To those who lose their jobs, their training opportunities, or their fringe benefits as a result of the minimum wage, the law is simply one more example of good intentions producing hellish results…

In view of what minimum wage laws actually do, their often uncritical acceptance as a major weapon in the war on poverty stands as one of the supreme ironies of modern politics. If a minimum wage set $.50 above the prevailing wage helps the working poor with no ill effects, why not eliminate poverty completely by simply legislating a minimum wage of $10.00? The problem, of course, is that pricing people out of a job does not reduce poverty. Neither does skewing compensation packages toward money wages and away from training, or encouraging employers to substitute skilled workers for unskilled workers, part-time jobs for full-time jobs, foreign labor for domestic labor, and machines for people. Minimum wage laws do all of these things and, in the process, almost surely do the disadvantaged more harm than good.

Anhony de Jasay calls for a bit of spine on the part of the French government.

French unemployment for the under-25 age group is 23 per cent compared with an average of under 10 per cent. French labour law is among the most elaborate in the world. As I write this, it is 2,632 pages long and is growing longer almost by the hour. It is aimed at ever tighter job protection. Laying off employees has become very difficult. It can be prohibitively expensive and may involve batteries of labour lawyers litigating endlessly while the employees in question draw their salaries. The obvious result is that business fears the risk of getting caught with labour it no longer wants. Firms are reluctant to hire anyone, let alone the untried and untrained young. To get round this, the government has just amended the labour law, which permits employers to dismiss under 25 year old workers (who have not been previously employed) without specific justification during a two-year period, though with normal notice and fairly generous compensation. Not unreasonably, the government argues that even if the young employee is not retained beyond two years, she will have gained work experience, learnt the habit of getting up in the morning, and become more employable. In any event, two years in an insecure job is better than the mortal boredom of idleness.

Written by Admin

April 6, 2006 at 11:29 pm

Posted in Uncategorized

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