CHAPTER 3 |
Of sentences that stir my bile,
Of phrases I detest,
There’s one beyond all others vile:
“He did it for the best.”
—James Kenneth Stephen, The Malefactor’s Plea
SOME MIGHT FIND IT PUZZLING that during the times of gross racial discrimination, black unemployment was lower and blacks were more active in the labor market than they are today. In 1910, for example, 71 percent of blacks over nine years of age were employed, compared to 51 percent for whites.[1] Earlier periods display the same pattern. Table 3.1 shows the employment-to-population ratio by race between 1900 and 1990. After 1930, however, the nonwhite employment-population ratio fell significantly, while the white ratio rose significantly. Also during earlier periods, the duration of unemployment among blacks was shorter than among white—between 1890 and 1900, by 13 percent; in more recent times, the duration for blacks has been 15 percent longer than for whites.[2]
Table 3.1. The Employment–Population Ratio by Race in the United States, 1900 to 1990
|
Year |
% Employment– |
% Employment– |
Nonwhite to White |
|
1900 |
57.4 |
45.5 |
1.26 to 1 |
|
1930 |
60.2 |
44.7 |
1.35 to 1 |
|
1954 |
58.0 |
55.2 |
1.50 to 1 |
|
1975 |
50.1 |
56.7 |
0.88 to 1 |
|
1990 |
56.2 |
63.6 |
0.88 to 1 |
Source: Richard K. Vedder and Lowell E. Galloway, Out of Work: Unemployment and Government in Twentieth-Century America (New York: Holmes & Meir, 1993), 281. | |||
In the early 1900s, coal mining companies competed vigorously for black workers.[3] Robert Higgs shows a high percentage (87.4) of blacks gainfully employed in 1910.[4] Moreover, during these earlier periods, the black wage rate for agricultural employment was nearly identical to that of whites.[5] In 1908, a keen observer of the South, Ray Stannard Baker, said, “One of the most significant things I saw in the South—and I saw it everywhere—was the way in which the white people were torn between their feeling of racial prejudice and their downright economic needs.”[6]
Those observations cannot be explained simply by racial tastes. Surely, one cannot explain the fact of higher black employment rates during earlier periods as a product of less racial discrimination. Competition and open markets, unhampered by government sanctions and subsidies for race discrimination, provide a far better explanation for why blacks had a much greater labor-force participation rate and a lower unemployment rate than that of whites during a particularly racially hostile period in U.S. history. Richard Vedder and Lowell Galloway suggest that while other factors may have been at work, New Deal interventions (Davis-Bacon Act, Fair Labor Standards Act, National Labor Relations Act, Social Security Act, and other labor legislation) during the 1930s and later cannot be easily dismissed as a major factor in reducing work opportunities for blacks.
The Davis-Bacon Act
Kansas, in 1891, was the first state to establish what has become known as prevailing wage laws.[7] The law read: “That not less than the current rate of per diem wages in the locality where the work is performed shall be paid to laborers, workmen, mechanics and other persons so employed by or on behalf of the state of Kansas. . . .”[8] In 1894, New York became the second state to enact a prevailing wage law. Samuel Gompers, president of the American Federation of Labor (AFL), led the political charge in both states and later the call for a federal prevailing wage law.
The impetus for a law at the federal level began in 1927, when an Alabama contractor successfully won a bid on a government contract to build a Veterans Bureau hospital on Long Island. Ethelbert Stewart, commissioner of labor statistics, said, “A contractor from a Southern State secured a contract to build a Government marine hospital, as I remember it, on Long Island; . . . he brought with him an entire outfit of Negro laborers from the South. . . .”[9] In response to the Alabama contractor’s underbidding of his local counterparts, New York Representative Robert Bacon submitted H.R. 17069, “A Bill to Require Contractors and Subcontractors Engaged on Public Works of the United States to Comply with State Laws Relating to Hours of Labor and Wages of Employees on State Public Works.”
Between 1927 and 1930, Congress introduced at least fourteen bills to regulate wages on public works projects.[10] And as the Depression deepened, Congress’s unwillingness to interfere with private employment contracts changed. By 1931, construction industry wages had fallen by one-half, and 700,000 construction workers became unemployed as construction projects fell by 70 percent between 1929 and 1933.[11] Congressmen received numerous complaints that contractors were bidding wages down and employing itinerants to replace local workers. That wave of unemployment, together with resulting complaints, ultimately strengthened the hand of unions pressing for the enactment of a prevailing wage law at the federal level.
In support of Representative Bacon’s bill, Representative William Upshaw of Georgia complained of the “superabundance or large aggregation of negro labor,” which he characterized as a problem “you are confronted with in any community.”[12] In response to Bacon’s description of his district hospital’s situation, Upshaw remarked: “You will not think a southern man is more than human if he smiles over the fact of your reaction to the real problem you are confronted with in any community with a superabundance or aggregation of Negro labor.”[13] To which Bacon replied: “I just mentioned the fact because that was the fact in this particular case, but the same would be true if you should bring in a lot of Mexican laborers or if you brought in any non-union laborers from any other state.”[14]
Finally, after thirteen additional, similar bills had been submitted, one, co-sponsored by Representative Bacon and Pennsylvania Senator James J. Davis passed on March 31, 1931. It mandated the payment of locally prevailing wages and benefits on all federally financed, or assisted, construction projects that exceeded $5,000 (reduced to $2,000 four years later). The Davis-Bacon Act had established federally mandated super-minimum wages in the construction industry.
While blacks were excluded from most major construction unions, they were nonetheless a formidable force in the construction industry. In 1930, the industry in the South provided more jobs to blacks than any other except agriculture and domestic services.[15] In six Southern cities, blacks represented more than 80 percent of the unskilled labor force.[16] They were also represented among skilled construction workers, for example, comprising 17 percent of carpenters. During this period, significant demographic changes were taking place. Blacks were increasingly migrating northward and establishing a foothold in the Northern construction workforce.[17]
As can be seen from the congressional testimony of its supporters, the Davis-Bacon Act was aimed at decoupling that foothold. Said Representative Clayton Allgood, “Reference has been made to a contractor from Alabama who went to New York with bootleg labor. This is a fact. That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country. This bill has merit, and with the extensive building program now being entered into, it is very important that we enact this measure.”[18] Representative John J. Cochran of Missouri voiced similar sentiments, saying he had “received numerous complaints in recent months about Southern contractors employing low-paid colored mechanics getting work and bringing the employees from the South.”[19] William Green, president of the American Federation of Labor, made clear the unions’ interests: “[C]olored labor is being sought to demoralize wage rates [in Tennessee].”[20]
In addition to black workers, those of non-European descent were targeted. In 1927, Representative Bacon entered in the Congressional Record a statement by thirty-four university professors concerning the new immigration law: “We urge the extension of the quota system to all countries of North and South America from which we have substantial migration and in which the population is not predominantly of the white race. . . . Only by this method can that large proportion of our population which is descended from the colonists . . . have their proper racial representation. . . . Congress wisely concluded that only by such a system of proportional representation . . . could the racial status quo be maintained.”[21]
Bacon’s reference was to the Johnson Act of 1924, which established immigration quotas. Representative Anning Prall said, “On this job [Fort Wadsworth Reservation] secured by a private contractor, 50 percent of the carpenters employed at one time were aliens, while thousands of unemployed American citizens were tramping the streets looking for work.”[22] Representative Hamilton Fish said, in support of the Davis-Bacon Act, “In conclusion I want to say that I am wholeheartedly for the bill. I do not think it goes far enough. I’m sorry there is not a clause in the bill to give preference to local and American labor over alien labor.”[23] Added Representative Fiorello La Guardia of New York, “The workmanship of the cheap imported labor was of course very inferior.”[24] Other congressmen testifying in support of Davis-Bacon lamented the use of “cheap labor,” “migratory labor,” and “minimum labor” underbidding American workers.[25]
Effects of the Davis-Bacon Act
Davis-Bacon exemplifies collusion between a seller (labor) and contractors (buyers) on federal construction projects to insure payment to workers of a minimum (“prevailing”) wage. The Secretary of Labor determines the prevailing wage according to various formulas. One study found that over 90 percent of the determinations equaled the union rate in the area, although non-union work accounted for large fractions of construction workers. Another study showed that Davis-Bacon determinations are 4 percent higher than average wages in commercial construction and 9 percent higher in residential construction.[26] A more recent survey found that Davis-Bacon wage determinations were 15 to 40 percent higher than market wages. For example, Davis-Bacon wages for a carpenter in New York ranged between $34 and $40, while the market wage was around $24.[27]
In practice, and contrary to the Davis-Bacon Act, prevailing wages are determined by the Department of Labor to be the union wage in the area or higher, and “therefore have been useful to the building trades union in preventing minimum wage competition below these minimums.”[28] The act’s wage and work jurisdiction requirements make it costly for non-union shops to hire and train unskilled workers, because they had to pay workers wages and benefits that exceed worker productivity. Initially, the act’s regulations did not make a distinction between unskilled and skilled workers unless the former were members of a union apprenticeship program. As a result, contractors were forced to pay a worker who was not a member of such a program the same wage as a skilled worker.
Given that situation, Ralph C. Thomas, executive director of the National Association of Minority Contractors, said that a contractor has “no choice but to hire skilled tradesmen, the majority of which are majority [white]. . . . Davis-Bacon . . . closes the door in such activity in an industry most capable of employing the largest numbers of minorities.”[29] Government paperwork requirements, to be in compliance with the Davis-Bacon Act, have a differential adverse impact on small, non-union contractors. Unlike major contractors, small ones typically do not have attorneys on retainer and/or personnel with the expertise necessary for paperwork compliance. This confers a competitive advantage on larger, usually unionized, contractors who do have such resources.[30]
According to Vedder and Galloway, prior to the enactment of the Davis-Bacon Act, black and white construction unemployment registered similar levels. After the enactment of the Davis-Bacon Act, however, black unemployment rose relative to that of whites.[31] Vedder and Galloway also argue that 1930 to 1950 was a period of unprecedented and rapidly increasing government intervention in the economy. This period saw enactment of the bulk of legislation restraining the setting of private wage, such as the Fair Labor Standards Act, Davis-Bacon Act, Walsh-Healey Act, and National Labor Relations Act. The Social Security Act also played a role, forcing employers to pay for a newly imposed fringe benefit.[32] Vedder and Galloway also note that this period saw a rapid increase in the black/white unemployment ratio.
Cases of Davis-Bacon Exclusion
The U.S. Department of Housing and Urban Development (HUD) finances housing rehabilitation programs. Since they are federally funded, the programs come under the jurisdiction of the Davis-Bacon Act. Mary Nelson, director of Bethel New Life Inc., a Chicago-based social service organization, found that Davis-Bacon adds as much as 25 percent to her housing renovation costs. It frequently prevents her from hiring the low-income, low-skills residents to do rehabilitation work in the housing project in which they live.[33]
Elzie Higginbottom builds low-income housing in Chicago. In order to comply with the provisions of Davis-Bacon, he must pay carpenters (defined by the Labor Department as anyone who hammers a nail) $23 an hour. Higginbottom says, “I’ve got to start out a guy at $16 an hour to find out if he knows how to dig a hole. I can’t do that.” As a result he is prevented from hiring unskilled local blacks.[34]
Ralph L. Jones is the president of a company that manages housing projects for HUD. When Jones decided to repair 200 dilapidated units, he planned to employ unskilled residents, at $5 an hour, to pull out unsalvageable parts of the building and later to assist skilled craftsmen in restoring the property. However, the Davis-Bacon Act required that he pay laborers $14 an hour. He was forced to hire only skilled laborers, very few of whom were black or residents of the project.[35]
Constitutional Test of the Davis-Bacon Act
On November 9, 1993, the Washington-based Institute for Justice filed a lawsuit challenging the constitutionality of the Davis-Bacon Act. The case is Brazier Construction Co., et al. v. Robert Reich, et al. The plaintiffs were four black construction contractors and three public housing tenant organizations. They argued that, according to previous Supreme Court decisions, a statute may have discriminatory purpose even if it is neither “expressed [in] or appear[s] on the face of the statute.”[36] In fact, courts may “[d]etermine whether invidious discriminatory purpose was a motivating factor” by conducting “a sensible inquiry into such circumstantial and direct evidence as may be available.”[37] According to its decision in Village of Arlington Heights v. Metropolitan Housing Development Corporation, the Supreme Court held that for a statute to be constitutionally invalid, racial discrimination does not have to be the sole motivating factor but only one motivating factor.[38] When the legislative intent of the statute can be reasonably shown to be racially discriminatory, judicial deference to the legislature is not justified. The court has held that “the legislative or administrative history may be highly relevant, especially where there are contemporary statements by members of the decision-making body, minutes of its meetings, or reports” among the factors that can be used to prove racially discriminatory intent.
In 2002, the U.S. District Court for the District of Columbia ruled against the plaintiffs. The decision was not appealed.
Minimum Wages
The minimum wage law has a history that started well before it became a federal law. In September 1918, the District of Columbia Wage Board enacted a law providing for the fixing of minimum wages for women and children. In 1923, the law was challenged in the U.S. Supreme Court in Adkins v. Children’s Hospital[39] and was eventually held unconstitutional by a 5–3 decision. The constitutionality of the minimum wage law made its way into the Supreme Court again in 1937 in West Coast Hotel v. Parrish. By a 5–4 vote, the court reversed its earlier ruling and upheld the validity of the Washington State statute.[40] That paved the way for the Fair Labor Standards Act (FLSA) of 1938, establishing a federal minimum wage law that applies to employees engaged in and producing goods for interstate commerce.
The FLSA enacted by Congress has been amended many times to increase the legal minimums and the extent of employment coverage under its provisions. Initially, workers exempt from coverage of the act included agricultural and seasonal laborers, handlers of perishable goods, and workers in certain industries covered by collective bargaining. Recently enacted legislation has created a three-step increase in the federal hourly minimum wage: $5.85 in 2007, $6.55 in 2008, and $7.25 in 2009. The federal minimum wage is complemented by state laws that sometimes exceed the federal requirements. Federal and state minimum wage laws represent deliberate governmental intervention in the labor market to produce a pattern of results other than that produced in a free labor market.
Minimum Wage Effects
Understanding the effects of minimum wage laws requires first a few simple observations. While legislative bodies have the power to order wage increases, they have not found a way to order commensurate increases in worker productivity that make the worker’s output worth the higher wage. Further, while Congress can legislate the wage at which labor transactions occur, it cannot require that the transaction actually be made. That is, Congress has not yet chosen to mandate that a worker actually be hired. To the extent that the minimum wage law raises a worker’s pay level that exceeds his productivity, employers, predictably, make adjustments in their use of labor.[41] Such an adjustment will produce gains for some workers at the expense of other workers. Those workers who retain their jobs receive a higher wage gain. Most of the adverse effects are borne by the workers who are most disadvantaged in terms of marketable skills. They will lose their jobs or not be hired in the first place.
The effect of the minimum wage law is more clearly seen if we put ourselves in the place of an employer and ask: if a wage of $7.25 per hour must be paid no matter who is hired, what kind of worker does it pay to hire?[42] Clearly the answer, in terms of profit and economic efficiency, is to hire one whose productivity equals or exceeds $7.25 per hour. If such workers are available, it does not pay the firm to hire those whose productive output is, say, worth only $4 per hour. Even if an employer were willing to train such a worker, the fact that he must be paid a wage higher than the market value of his output makes on-the-job training an unattractive proposition.
The impact of legislated minimums can be brought into sharper focus if we ask a distributional question: who bears the burden of the minimum wage? As suggested earlier, it is the workers who are the most marginal, that is, those who employers perceive as being less productive, more costly, or otherwise less desirable to employ than other workers. In the U.S. there are at least two segments of the labor force that share marginal worker characteristics to a greater extent than do other segments of the labor force. The first group consists of youths in general. They are low-skilled or marginal because of their age, immaturity, and lack of work experience. The second group, which contains members of the first, are racial minorities, such as blacks and Hispanics who, as a result of historical factors, are disproportionately represented among low-skilled workers. They are not only made less employable by minimum wages; opportunities to upgrade their skills through on-the-job training are also severely limited when they find it hard to get jobs.[43]
It is precisely these labor market participants who are disproportionately represented among the unemployment statistics. Youth unemployment, even during relatively prosperous times, ranges from two to three times that of the general labor force. And black youth unemployment, nationally for more than a half century, has ranged from two to three times the corresponding rate for whites. Historically, in some metropolitan areas, black youth unemployment has been higher than 60 percent!
The economic effects of minimum wage legislation have been analyzed in numerous statistical studies.[44] While there is a debate over the magnitude of the effects, the weight of research by academic scholars points to the conclusion that unemployment for some population groups is directly related to legal minimum wages and that the unemployment effects of the minimum wage law are felt disproportionately by nonwhites. Indeed, a 1976 survey by the American Economic Association found that 90 percent of its members agreed that increasing the minimum wage increases unemployment among young and unskilled workers.[45] It was followed by another survey, in 1990, that found that 80 percent of economists agreed with this statement: increases in the minimum wage cause unemployment among the youth and low-skilled.[46]
In addition, whenever one wants to find a broad consensus of opinion in any subject, he should investigate what is said in the introductory and intermediate college textbooks on that subject. When he does this in economics, he finds broad agreement that the minimum wage causes unemployment among low-skilled workers.[47] Reports from several government agencies, such as the General Accounting Office,[48] Congressional Budget Office,[49] and the Council of Economic Advisors,[50] reach the same conclusion.
In 1994, David Card and Alan B. Krueger, two Princeton University economists, published a study that challenged conventional economic wisdom about the unemployment effects of minimum wage laws.[51] The authors surveyed 410 fast-food restaurants in New Jersey and eastern Pennsylvania before and after the 1992 increase in New Jersey’s minimum wage from $4.25 to $5.05 per hour. They found no indication that the rise in the minimum wage reduced employment. Later their findings were published in a book titled Myth and Measurement: The New Economics of the Minimum Wage.[52] Politicians, labor union officials, and other supporters of higher minimum wages greeted the study with glee and seized upon it to make their political case for legislative increases.
But since the Card and Krueger finding challenges basic economic theory—the law of demand that holds that the higher the price of something the less is taken, and vice versa—the study came under instant professional scrutiny and has been thoroughly discredited.
The major challenge came from the Employment Policies Institute, which issued a 1996 report titled, “New Evidence on the Minimum Wage: The Crippling Flaws in the New Jersey Fast Food Study.”[53] They found that the employment effects of the New Jersey minimum wage increase were negative and quite consistent with the prevailing wisdom. A follow-up investigation by Professors David Neumark and William Wascher for the National Bureau of Economic Research showed that Card and Krueger collected data incorrectly.[54]
The best data Card and Krueger could have obtained from these restaurants were the numbers of hours worked. However, they did not obtain that data; instead, they conducted telephone interviews. Neumark and Wascher obtained the payroll data from the restaurants the Princeton professors surveyed. When the former pair calculated the numbers, using the identical statistical methodology of Card and Krueger, they found that unemployment in Pennsylvania rose more rapidly than unemployment in New Jersey. A presidential commission reported in 1980 that teenage employment fell 1 to 3 percent for every 10 percent hike in the minimum wage. The difference between Pennsylvania and New Jersey was exactly within that range.[55]
Although most people are familiar with more recent statistics on black youth unemployment, not many are aware of the black/white statistics for earlier periods. Table 3.2 shows that in 1948, the two were roughly equal. For that year, blacks aged sixteen to seventeen had an unemployment rate that was less than whites of the same age—9.4 percent compared to a 10.2 percent. During the same period (until the mid-1960s), Table 3.3 shows that black youths generally were either just as active as whites in the labor force or more so. Since the ’60s, both the labor-force participation rate and the employment rate of black youths has fallen to what it is today. For those sixteen to seventeen years of age, the participation rate is less than 60 percent of that of white youths. During earlier periods, as shown in Table 3.2, the rate was equal to or higher than that of white youths.
Table 3.2. Comparison of Youth and General Unemployment by Race (Males) |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
|
Year |
General |
White |
Black |
B/W |
White |
Black |
B/W |
White |
Black |
B/W |
|
1948 |
3.8 |
10.2 |
9.4 |
0.92 |
9.4 |
10.5 |
1.11 |
6.4 |
11.7 |
1.83 |
|
1949 |
5.9 |
13.4 |
15.8 |
1.18 |
14.2 |
17.1 |
1.20 |
9.8 |
15.8 |
1.61 |
|
1950* |
5.3 |
13.4 |
12.1 |
0.90 |
11.7 |
17.7 |
1.51 |
7.7 |
12.6 |
1.64 |
|
1951 |
3.3 |
9.5 |
8.7 |
0.92 |
6.7 |
9.6 |
1.43 |
3.6 |
6.7 |
1.86 |
|
1952 |
3.0 |
10.9 |
8.0 |
0.73 |
7.0 |
10.0 |
1.43 |
4.3 |
7.9 |
1.84 |
|
1953 |
2.9 |
8.9 |
8.3 |
0.93 |
7.1 |
8.1 |
1.14 |
4.5 |
8.1 |
1.80 |
|
1954 |
5.5 |
14.0 |
13.4 |
0.96 |
13.0 |
14.7 |
1.13 |
9.8 |
16.9 |
1.72 |
|
1955 |
4.4 |
12.2 |
14.8 |
1.21 |
10.4 |
12.9 |
1.24 |
7.0 |
12.4 |
1.77 |
|
1956* |
4.1 |
11.2 |
15.7 |
1.40 |
9.7 |
14.9 |
1.54 |
6.1 |
12.0 |
1.97 |
|
1957 |
4.3 |
11.9 |
16.3 |
1.37 |
11.2 |
20.0 |
1.70 |
7.1 |
12.7 |
1.79 |
|
1958 |
6.8 |
14.9 |
27.1 |
1.81 |
16.5 |
26.7 |
1.62 |
11.7 |
19.5 |
1.66 |
|
1959 |
5.5 |
15.0 |
22.3 |
1.48 |
13.0 |
27.2 |
2.09 |
7.5 |
16.3 |
2.17 |
|
1960 |
5.5 |
14.6 |
22.7 |
1.55 |
13.5 |
25.1 |
1.86 |
8.3 |
13.1 |
1.58 |
|
1961* |
6.7 |
16.5 |
31.0 |
1.89 |
15.1 |
23.9 |
1.58 |
10.0 |
15.3 |
1.53 |
|
1962 |
5.5 |
15.1 |
21.9 |
1.45 |
12.7 |
21.8 |
1.72 |
8.0 |
14.6 |
1.83 |
|
1963 |
5.7 |
17.8 |
27.0 |
1.52 |
14.2 |
27.4 |
1.83 |
7.8 |
15.5 |
1.99 |
|
1964 |
5.2 |
16.1 |
25.9 |
1.61 |
13.4 |
23.1 |
1.72 |
7.4 |
12.6 |
1.70 |
|
1965 |
4.5 |
14.7 |
27.1 |
1.84 |
11.4 |
20.2 |
1.77 |
5.9 |
9.3 |
1.58 |
|
1966 |
3.8 |
12.5 |
22.5 |
1.80 |
8.9 |
20.5 |
2.30 |
4.1 |
7.9 |
1.93 |
|
1967* |
3.8 |
12.7 |
28.9 |
2.26 |
9.0 |
20.1 |
2.23 |
4.2 |
8.0 |
1.90 |
|
1968* |
3.6 |
12.3 |
26.6 |
2.16 |
8.2 |
19.0 |
2.31 |
4.6 |
8.3 |
1.80 |
|
1969 |
3.5 |
12.5 |
24.7 |
1.98 |
7.9 |
19.0 |
2.40 |
4.6 |
8.4 |
1.83 |
|
1970 |
4.9 |
15.7 |
27.8 |
1.77 |
12.0 |
23.1 |
1.93 |
7.8 |
12.6 |
1.62 |
|
1971 |
5.9 |
17.1 |
33.4 |
1.95 |
13.5 |
26.0 |
1.93 |
9.4 |
16.2 |
1.72 |
|
1972 |
5.6 |
16.4 |
35.1 |
2.14 |
12.4 |
26.2 |
2.11 |
8.5 |
14.7 |
1.73 |
|
1973 |
4.9 |
15.1 |
34.4 |
2.28 |
10.0 |
22.1 |
2.21 |
6.5 |
12.6 |
1.94 |
|
1974* |
5.6 |
16.2 |
39.0 |
2.41 |
11.5 |
26.6 |
2.31 |
7.8 |
15.4 |
1.97 |
|
1975* |
8.1 |
19.7 |
45.2 |
2.29 |
14.0 |
30.1 |
2.15 |
11.3 |
23.5 |
2.08 |
|
1976* |
7.0 |
19.7 |
40.6 |
2.06 |
15.5 |
35.5 |
2.29 |
10.9 |
22.4 |
2.05 |
|
1977 |
6.8 |
17.6 |
38.7 |
2.20 |
13.0 |
36.1 |
2.78 |
9.3 |
21.7 |
2.33 |
|
1978* |
6.6 |
19.4 |
40.4 |
2.08 |
13.0 |
32.2 |
2.47 |
10.0 |
22.5 |
2.25 |
|
1979* |
5.8 |
16.1 |
34.4 |
2.14 |
12.3 |
29.6 |
2.41 |
7.4 |
17.0 |
2.30 |
|
1980* |
7.1 |
18.5 |
37.7 |
2.04 |
14.6 |
33.0 |
2.26 |
11.1 |
22.3 |
2.01 |
|
1981* |
7.6 |
19.9 |
43.2 |
2.17 |
16.4 |
39.2 |
2.39 |
11.6 |
26.4 |
2.28 |
|
1982 |
9.7 |
24.2 |
52.7 |
2.18 |
20.0 |
47.1 |
2.36 |
14.3 |
31.5 |
2.20 |
|
1983 |
9.6 |
22.6 |
52.2 |
2.31 |
18.7 |
47.3 |
2.53 |
13.8 |
31.4 |
2.28 |
|
1984 |
7.5 |
19.7 |
44.0 |
2.23 |
15.0 |
42.2 |
2.81 |
9.8 |
26.6 |
2.71 |
|
1985 |
7.2 |
19.2 |
42.9 |
2.19 |
14.7 |
40.0 |
2.72 |
9.7 |
23.5 |
2.42 |
|
1986 |
7.0 |
18.4 |
41.4 |
2.25 |
14.7 |
38.2 |
2.60 |
9.2 |
23.5 |
2.55 |
|
1987 |
6.2 |
17.9 |
39.0 |
2.18 |
13.7 |
31.6 |
2.31 |
8.4 |
20.3 |
2.42 |
|
1988 |
5.5 |
16.1 |
34.4 |
2.14 |
12.4 |
31.7 |
2.56 |
7.4 |
19.4 |
2.62 |
|
1989 |
5.3 |
16.4 |
34.4 |
2.10 |
12.0 |
30.3 |
2.53 |
7.5 |
17.9 |
2.39 |
|
1990* |
5.5 |
15.9 |
38.9 |
2.44 |
13.1 |
28.2 |
2.15 |
7.6 |
20.2 |
2.66 |
|
1991* |
6.7 |
19.4 |
39.0 |
2.01 |
16.3 |
35.2 |
2.16 |
10.2 |
22.4 |
2.20 |
|
1992 |
7.4 |
21.3 |
47.5 |
2.23 |
16.4 |
39.1 |
2.38 |
10.4 |
24.5 |
2.36 |
|
1993 |
6.8 |
20.1 |
42.7 |
2.12 |
15.9 |
38.6 |
2.43 |
9.5 |
23.0 |
2.42 |
|
1994 |
6.1 |
18.5 |
39.3 |
2.12 |
14.7 |
36.5 |
2.48 |
8.8 |
19.4 |
2.20 |
|
Year |
General |
White |
Black |
B/W |
White |
Black |
B/W |
|||
|
1995** |
5.2 |
16.1 |
38.9 |
2.42 |
4.2 |
9.0 |
2.14 |
|||
|
1996* |
5.0 |
14.7 |
38.6 |
2.63 |
3.8 |
8.0 |
2.11 |
|||
|
1997* |
4.4 |
10.7 |
36.7 |
3.43 |
3.5 |
8.2 |
2.34 |
|||
|
1998 |
4.0 |
13.7 |
26.4 |
1.93 |
3.2 |
6.5 |
2.03 |
|||
|
1999 |
3.7 |
13.2 |
25.8 |
1.95 |
2.8 |
6.9 |
2.46 |
|||
|
2000 |
3.7 |
12.6 |
30.8 |
2.44 |
3.0 |
7.2 |
2.40 |
|||
|
2001 |
5.4 |
15.3 |
33.6 |
2.19 |
4.7 |
9.1 |
1.94 |
|||
|
2002 |
5.7 |
15.1 |
36.5 |
2.41 |
4.9 |
10.7 |
2.18 |
|||
|
2003 |
5.6 |
16.1 |
29.6 |
1.83 |
5.0 |
10.4 |
2.10 |
|||
|
2004 |
5.2 |
18.0 |
39.5 |
2.19 |
4.6 |
9.5 |
2.10 |
|||
|
2005 |
4.7 |
13.6 |
23.8 |
1.75 |
4.0 |
10.4 |
2.60 |
|||
|
2006 |
4.0 |
14.9 |
26.9 |
1.80 |
3.6 |
7.6 |
2.10 |
|||
|
2007* |
4.1 |
16.6 |
39.4 |
2.40 |
3.7 |
7.5 |
2.00 |
|||
|
2008* |
6.1 |
21.5 |
35.3 |
1.60 |
4.9 |
10.2 |
2.00 |
|||
|
2009* |
9.3 |
27.4 |
52.2 |
1.90 |
8.8 |
16.3 |
1.88 |
|||
*Shows change in the federal minimum wage law. **After 1994, the Department of Labor no longer reported unemployment by previous age categories. Sources: Unemployment Rate, by Race and Hispanic Origin: 1980 to 1998, www.census.gov/prod/99pubs/99statab/sec13.pdf (accessed September 29, 2010); Department of Labor, Bureau of Labor Statistics, The Employment Situation: January 2003, December 2002, 2001, 2000, 1999, 1998, 1997, 1996, www.bls.gov/schedule/archives/empsit (accessed February 14, 2003); Economagic.com: Economic Time Series Page, U.S. Labor Force Data from the BLS: Unemployment Rate-Civilian Labor Force 16–19 yes. Black Male; www.economagic.com/em-cgi/data.exe/BLSLF/LFS21000831 (accessed February 17, 2003); Economagic.com: Economic Time Series Page, U.S. Labor Force Data from the BLS: Unemployment Rate—Civilian Labor Force 16–19 yrs. White Male; www.economagic.com/em-cgi/data.exe/BLSLF/LFS21000811 (accessed February 17, 2003); Department of Labor, Bureau of Labor Statistics, data/bls.gov/PDG/servlet/SurveyOutputServlet (accessed February 17, 2003). |
||||||||||
|
Table 3.3. Male Civilian Labor-Force Participation: Ratio by Race and Age |
|||||
|---|---|---|---|---|---|
|
Wage |
Year |
B/W Males |
B/W Males |
B/W Males |
B/W Males |
|
1954 |
0.99 |
1.11 |
1.05 |
1.00 |
|
|
1955 |
1.00 |
1.01 |
1.05 |
1.00 |
|
|
1.00/hr. |
1956 |
0.96 |
1.06 |
1.01 |
0.99 |
|
1957 |
0.95 |
1.01 |
1.03 |
0.99 |
|
|
1958 |
0.96 |
1.03 |
1.02 |
1.00 |
|
|
1959 |
0.92 |
1.02 |
1.04 |
1.00 |
|
|
1960 |
0.99 |
1.03 |
1.03 |
1.00 |
|
|
1.15/hr. |
1961 |
0.96 |
1.06 |
1.02 |
0.99 |
|
1962 |
0.93 |
1.04 |
1.03 |
0.98 |
|
|
1.25/hr. |
1963 |
0.87 |
1.02 |
1.04 |
0.99 |
|
1964 |
0.85 |
1.01 |
1.04 |
0.99 |
|
|
1965 |
0.88 |
1.01 |
1.05 |
0.99 |
|
|
1966 |
0.87 |
0.97 |
1.06 |
0.98 |
|
|
1.40/hr. |
1967 |
0.86 |
0.95 |
1.04 |
0.97 |
|
1.60/hr. |
1968 |
0.79 |
0.96 |
1.03 |
0.97 |
|
1969 |
0.77 |
0.95 |
1.02 |
0.96 |
|
|
1970 |
0.71 |
0.92 |
1.00 |
0.96 |
|
|
1971 |
0.65 |
0.87 |
0.98 |
0.94 |
|
|
1972 |
0.68 |
0.85 |
0.97 |
0.93 |
|
|
1973 |
0.63 |
0.85 |
0.95 |
0.93 |
|
|
2.00/hr. |
1974 |
0.65 |
0.85 |
0.95 |
0.92 |
|
2.10/hr. |
1975 |
0.57 |
0.79 |
0.92 |
0.91 |
|
2.30/hr. |
1976 |
0.57 |
0.77 |
0.91 |
0.90 |
|
1977 |
0.57 |
0.77 |
0.90 |
0.90 |
|
|
2.65/hr. |
1978 |
0.60 |
0.79 |
0.89 |
0.92 |
|
2.90/hr. |
1979 |
0.57 |
0.78 |
0.91 |
0.91 |
|
3.10/hr. |
1980 |
0.60 |
0.76 |
0.91 |
0.90 |
|
3.35/hr. |
1981 |
0.57 |
0.75 |
0.91 |
0.90 |
|
1982 |
0.50 |
0.78 |
0.91 |
0.91 |
|
|
1983 |
0.53 |
0.77 |
0.92 |
0.92 |
|
|
1984 |
0.57 |
0.79 |
0.91 |
0.92 |
|
|
1985 |
0.61 |
0.84 |
0.91 |
0.92 |
|
|
1986 |
0.62 |
0.83 |
0.92 |
0.93 |
|
|
1987 |
0.65 |
0.81 |
0.90 |
0.93 |
|
|
1988 |
0.66 |
0.79 |
0.92 |
0.92 |
|
|
1989 |
0.66 |
0.81 |
0.92 |
0.92 |
|
|
1990 |
0.61 |
0.74 |
0.89 |
0.91 |
|
|
4.25/hr. |
1991 |
0.56 |
0.72 |
0.90 |
0.91 |
|
1992 |
0.62 |
0.79 |
0.88 |
0.91 |
|
|
1993 |
0.61 |
0.77 |
0.87 |
0.90 |
|
|
1994 |
0.63 |
0.78 |
0.86 |
0.91 |
|
|
1995* |
0.68 |
0.94 |
0.91 |
||
|
4.75/hr. |
1996 |
0.69 |
0.93 |
0.90 |
|
|
(5.15) |
1997 |
0.67 |
0.93 |
0.90 |
|
|
1998 |
0.72 |
0.93 |
0.91 |
||
|
1999 |
0.68 |
0.93 |
0.91 |
||
|
2000 |
0.71 |
0.97 |
0.95 |
||
|
2001 |
0.72 |
0.98 |
0.95 |
||
|
2002 |
0.64 |
0.98 |
0.94 |
||
|
2003 |
0.69 |
0.96 |
0.93 |
||
|
2004 |
0.68 |
0.97 |
0.94 |
||
|
2005 |
0.71 |
0.96 |
0.92 |
||
|
2006 |
0.66 |
0.95 |
0.91 |
||
|
2007 |
0.71 |
0.97 |
0.94 |
||
|
*The Bureau of Labor Statistics changed its age-group reporting methods in 1995. Sources: Computed from the following Department of Labor, Bureau of Labor Statistics publications, all published in Washington by the Government Printing Office: Handbook of Labor statistics 1975—Reference ed. (1975) 36–37; Employment and Unemployment in 1976: Special Labor Force Report 199 (1977)—1978–1980 figures obtained directly from department’s Employment Analysis Division; The Employment Situation: January 2003, December, 2002 (2003), 9,14; The Employment Situation: 2001 www.bls.census.gov/cps/pub/empsit_jan2001.htm (accessed September 27, 2010). |
|||||
Faced with those facts, one naturally asks why labor market opportunities have deteriorated so precipitously for black youths. Can racial discrimination explain the reversal? Probably not. It would be very difficult for anyone to argue that employers have now become more racially discriminatory than they were during the 1940s and 1950s. Can we say the lower unemployment for blacks in the past was because they had educational attainment levels and skills equal to or higher than whites? No, we cannot. The answers lie elsewhere. One of those answers is reduced employment opportunities as a result of minimum wage legislation.
But some supporters of the minimum wage law attempt to rebut this line of reasoning with another argument. For example, economist Professor Bernard Anderson said, “The minimum wage argument does not explain why black youths are so disproportionately affected; then why doesn’t it reduce it as much for white youths as it does for black youths?”[56] This is not a refutation of economic theory about effects of the minimum wage. It simply suggests that when faced with legislated wages that exceed the productivity of some workers, firms will make adjustments in their use of labor. One adjustment is not only to hire fewer youths but also to seek among them the more highly qualified candidates. It turns out for a number of socioeconomic reasons that white youths, more often than their black counterparts, have higher levels of educational attainment and training.[57] Therefore, a law that discriminates against low-skilled workers can be expected to place a heavier burden on black youths than on white ones.
Employer substitution of higher-skilled for lower-skilled workers is not the only effect of the minimum wage law. It also gives employers an economic incentive to make other changes: substitute machines for labor; change production techniques; relocate overseas; and eliminate certain jobs altogether.
The substitution of automatic dishwashers for hand washing, and automatic tomato-picking machines for manual pickers, are examples of the substitution of machines for labor in response to higher wages. The switch from sales ladies behind each counter in five-and-dime stores to checkout lines, from waiter-served to self-service and fast-food restaurants, from full-service to self-service gasoline stations are among the responses to higher labor costs. So, too, are the absence of movie theater ushers and the wide use by restaurants of plastic utensils and paper plates, because they do not require dishwashing.
Minimum Wage and Racial Discrimination
The idea that it is sometimes necessary for some individuals to lower their price in order to sell their services offends the sensibilities of many people who support the minimum wage law as a matter of a moral conviction motivated by concern for equity in the distribution of income. However, white racist unions in South Africa, with different motivation, have also been supporters of minimum wage laws and equal-pay-for-equal-work laws for blacks.
During South Africa’s apartheid era, white workers supported wage regulation. White unionists “argued that in absence of statutory minimum wages, employers found it profitable to supplant highly trained (and usually highly paid) Europeans by less efficient but cheaper non-whites.”[58]
Said the South African Economic and Wage Commission of 1925, supporting the Wage Act of the same year:
While definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed. Even the exceptional Native whose efficiency would justify his employment at the high rate, would be excluded by the pressure of public opinion, which makes it difficult to retain a Native in an employment mainly reserved for Europeans.[59]
The New York Times reported in 1972 that in South Africa:
Right wing white unions in the building trades have complained to the South African government that laws reserving skilled jobs for whites have broken and should be abandoned in favor of equal-pay-for-equal-work laws. . . . The conservative building trades made it clear that they were not motivated by concern for black workers but had come to feel that legal job reservation had been so eroded by government exemptions that it no longer protected the white worker.[60]
To understand how South Africa’s job-reservation laws became eroded requires only two bits of information: during the post-World War II period, there was a significant building boom in the country; and black construction workers were willing to accept wages 80 percent lower than those paid to whites. Such a differential made racial discrimination in hiring a costly proposition—and made contravening job-reservation laws economically attractive. Firms that chose to hire whites instead of blacks paid dearly—$1.91 per hour versus $0.39 per hour. White racist unions recognized that equal-pay-for-equal-work laws (a variation of minimum wage laws) would lower the cost of racial discrimination and thus improve their competitive position in the labor market.
Laws requiring equal pay for equal work produce effects similar to those mandating payment of a minimum wage. In fact, “equal pay for equal work” became the rallying slogan of South Africa’s white labor movement. Keir Hardie, a British labor leader, was greeted with rotten eggs during his visit there in 1907, because he advocated equality between whites and Indians. “He was afterwards allowed to speak, however, when the workers found that he believed in ‘equal pay for equal work’ regardless of colour or creed.”[61]
Declared the secretary of the apartheid era and avowedly racist Building Worker’s Union: “There is no job reservation left in the building industry, and in the circumstances I support the rate for the job as the second-best way of protecting our white artisans.”[62] A year later he stated that he would be prepared to allow black artisans into the industry provided that minimum wages were raised from Rand 1,40 to at least Rand 2,00 per hour and if the rate-for-the-job was strictly enforced.[63]
When Frederick Creswell became the country’s minister of labor, he introduced the Wage Bill of 1925, saying: “If our civilization is going to subsist we look upon it as necessary that our industries should be guided so that they afford any men desiring to live according to the European standards greater opportunities of doing so, and we must set our face against the encouragement of employment merely because it is cheap and the wage unit is low.”[64] In the 1930s, white workers approved of the wage board’s efforts to extend statutory minimum wages to nonwhites. The Labour Party minister for posts and telegraphs complained that whites were being ousted from jobs by “unfair competition,” particularly by the Indians in Natal. He urged that employers be forced to pay them the same wages they were paying whites.[65]
Intentions versus Effects
South Africa’s racist unions, during its apartheid era, supported minimum wages and equal-pay-for-equal-work laws (rate-for-the-job) for blacks. Were the intentions the same among Americans who support minimum wage laws? A racial effect of those laws can be found in the absence of racial preferences on behalf of employers. The minimum wage law gives firms economic incentives to seek to hire only the most productive employees, meaning that the firms are less willing to hire and/or train less productive employees, a group that includes teenagers, particularly minority teenagers. But ignoring productivity differences between black and white workers, the laws provide an incentive to discriminate racially in hiring. The reason is that the minimum wage law lowers the private cost of discriminating against the racially less-preferred person.
The fact that a well-intentioned policy such as the minimum wage law can foster and promote racial discrimination might be incomprehensible to some people. Therefore, it is useful to develop a nonracial example to illustrate the effects of such “price-setting.”
Consider filet mignon and chuck steak. Assume—realistically—that consumers prefer the former. Then the question becomes: why is it, despite consumer preferences, that chuck steak sells at all? The fact is that chuck steak outsells filet mignon. How does something less preferred compete with something more preferred? It does so by offering what economists call “compensating differences.” In other words, as you wheel your shopping cart down the aisle, chuck steak “says” to you, “I don’t look as nice as filet mignon, I’m not as tender and tasty, but I’m not as expensive either. I sell for $4.00 a pound while filet mignon sells for $9.00.” Chuck steak therefore in effect offers to “pay” you $5.00 per pound for its “inferiority,” a compensating difference.
Suppose sellers of filet mignon wanted to raise their sales by colluding against the less-preferred competitor. What would be their most effective strategy? Short of getting a law passed prohibiting sales of chuck steak, it would be to push for a law establishing minimum prices for steak. What would be the effect of a minimum steak law of, say, $9 per pound for all steaks?
Put yourself in the position of the shopper wheeling his cart down the aisle after the enactment of such a law. Chuck steak now says to you, “I don’t look as nice as filet mignon, I’m not as tender and tasty, and I sell for the same price as my preferred competitor, filet mignon. Buy me.” That plea would fall on deaf ears. You would say to yourself, “Why should I buy chuck steak when it sells for the same price as filet mignon, which I prefer anyway?” Such a sentiment exemplifies the basic law of demand: the lower the cost of doing something, the more of it will be done. In this case, the cost of discriminating against, not selecting, chuck steak is effectively zero. Prior to the legislated minimum price, the cost of discriminating against chuck steak was $5.00 per pound, the difference in price.
The steak example applies to any mandated minimum price. In the case of minimum wage laws, a mandated minimum lowers the cost of—hence encourages—the indulgence of racial preference in the labor market. Some might object to the validity of my example by saying that people are not the same thing as cuts of meat. That is true—just as steel balls are not the same as people. However, although steel balls and people are different, both obey the law of gravity. The independent influence of gravity on a steel ball’s acceleration is 32 feet per second per second and its influence on a person is exactly the same. Similarly, quantities demanded for cuts of meat are influenced by the law of demand, and so are quantities demanded of a person’s labor services.
To understand how the minimum wage can raise the probability of employer “preference indulgence” and racial discrimination, we must simply recognize that money income is not the only form of compensation businessmen earn.[66] Their compensation consists of non-money income as well. An employer prefers what he considers to be desirable, or more desirable, working conditions. They might include finer furniture, plusher carpets, prettier secretaries, and more likable employees. The quantity of these more desirable working conditions actually chosen depends on their costs in terms of foregone profits.
Suppose that an employer has a preference for white employees over black employees. And for expository simplicity, assume that the employees among whom he can choose are identical in terms of their productivity. If there is a statute like the minimum wage law, requiring that employers pay the same wage no matter who is hired, what are his incentives?[67] He must pay the black $7.25 per hour and the white $7.25 per hour. He must find some basis for choice. As a result of the minimum wage law, his choice cannot be based on economic criteria like differences in wages. It must be based on noneconomic criteria.
Obviously, race is a noneconomic criterion. If the employer has a preference for white workers, he can indulge it at zero cost. However, if there were no minimum wage and a black worker was willing to work for a lower wage, say $4 per hour, there would be positive costs to employer preference indulgence. In this example, it would be $3.25 per hour, the difference in wages per employee.
That’s only one part of the story. The market would penalize the employer who chooses employees and pays them higher wages based on market-irrelevant criteria.[68] Some employers would hire blacks at the lower wage—in our example, $4 per hour. Doing so and thereby incurring lower production costs, these firms would reap above-normal profits. The firms would be able to underprice the racially discriminating firms, capturing a greater share of the market and attracting more investors. In addition, new competitors might enter the market, enticed by the above-normal profits. In their attempt to secure the cheaper black labor, they would bid up wages. The pressure would be toward wage equality between blacks and whites, or at least lower unemployment among blacks.[69] This line of reasoning gains additional weight when we consider that blacks experienced less unemployment at times of far greater racial discrimination.
American Union Support for Minimum Wage Laws
As is the case in South Africa and elsewhere, unions in the United States are also the major supporters of the minimum wage law. While our unions state different bases for that support, one must always remember that the effects of a policy are by no means necessarily determined by its intentions. But a good case can be made that the effects of the minimum wage law are its intentions. This can be readily understood if we consider, as economists do, that in some productive activities, low-skilled workers are substitutes for higher-skilled workers. And if the latter, through the use of government’s coercive powers, can reduce or eliminate the employment of low-skilled workers, they can achieve monopoly power and command higher wages. A simple numerical example captures the essence of this strategy:
Suppose a hundred yards of fencing can be produced by using either one highly skilled or three low-skilled workers. If the wage of an individual highly skilled worker is $100 per day, and that of his low-skilled counterpart is $35 per day, the firm would employ the high-skilled worker because labor costs ($100 versus $105) would be lower and profits higher.
The highly skilled worker might recognize that one of the ways to increase his bargaining power would be to advocate a minimum wage of, say, $50 per day in the fencing industry. The arguments that the highly skilled worker would use to gain political support would be those given by our politicians and union leaders: “to raise the standard of living,” “prevent worker exploitation,” “provide a living wage,” “insure worker equality,” and so forth. After the enactment of a $50-a-day minimum wage law, the high-skilled worker can now demand any wage up to $150 per day (what it would now cost to hire three low-skilled workers) and retain employment.[70] Prior to the enactment of the minimum wage of $50 per day, a highly skilled worker’s demand for $150 per day would have cost him his job. The effect of the minimum wage is to price that worker’s competition out of the market.
Whether the example given above accurately portrays the motives behind labor unions’ support and their large lobbying expenditures in behalf of minimum wage increases is not really at issue. The effects of actions do not depend on intentions. Whatever the intentions, the effect is to price their competition out of the market.
The restrictive activities promoted by unions do reduce employment opportunities and the income of those priced out of the market. This suggests that union strategies to raise their members’ wages must be accompanied by lobbying for government welfare programs. Why? Because if unemployment meant starvation, there might be considerable political resistance to higher mandated wages. Unions therefore have incentives to support subsidy programs for those denied access to jobs.[71] Thus, it is probable that unions will lead the support for income-subsidy programs, such as the Job Corps, the Comprehensive Training and Education Act, summer work programs, food stamps, public service employment, and welfare.
The resulting redistribution of income constitutes a subsidy from society at large—that is, from those who pay taxes to those who have used the powers of government to restrict or eliminate job opportunity. Income-subsidy programs disguise the true effects of labor market restrictions created by unions and other economic agents by casting a few crumbs to those denied jobs in order to keep them quiet, thereby contributing to the creation of a permanent welfare class.
U.S. Business Support for Minimum Wage Laws
Businessmen have also used the minimum wage law as a means to protect themselves from competition. When John F. Kennedy was a senator, he supported increases in the law as a way of protecting New England industry from competitors in the South.[72] Farmers have supported agricultural versions of the law in order to reduce competition. This particularly insightful comment was made by New York Representative Joseph Y. Resnick in 1966 on behalf of his constituents:
Mr. Chairman, I would like to point out to all the members of the Northeast and from the city what this legislation means to them. For one thing, Mr. Chairman, it means that the farmers of the Northeast can compete fairly with farmers from the rest of the country.
Now, Mr. Chairman, we have poultry farmers in our part of the country. Our farmers pay anywhere from $1.25 to $1.75 an hour for help. I ask you how can they compete with poultry farmers in Mississippi who pay $3 a day for a ten-hour day.[73]
There are other instances of business interests that are served by minimum wage requirements in U.S. territories and Puerto Rico—and more recently in Mexico, under the North American Free Trade Agreement. In those cases, the businessman’s underlying desire is to reduce competition from lower-wage areas. Historically, for example, the minimum wage law got very little political support from low-wage states, especially those in the South.
Labor Market Myths
Before concluding our discussion of minimum wage laws, we should comment on several widely accepted labor market myths.
1. If teenagers are allowed to work at subminimum wages, they will be employed while their parents go unemployed. The statement assumes that there is a finite number of jobs available, i.e., that the acquisition of a job by one person necessarily means the loss of a job by another. There is no evidence to support the notion of a finite job total. The number of people employed by civilian enterprises in the United States grew from less than a million during colonial times to today’s 151 million. As long as human wants remain limitless, so will the number of potential jobs. If youths were exempted from the provisions of minimum wage, there would be some substitution in employment, but the overwhelming effect would be that of increasing total employment.
2. The employment problem faced by youths and others is that there are simply no jobs available. If this myth is accepted at face value, it is the same as saying that all human wants have been satisfied. It asserts that no one anywhere wishes to have more of some goods or services that would create employment opportunities for young people. There is no evidence to support such an assertion. As with other things of value, the quantity of labor hired conforms to the law of demand: the higher its price, the less it is used, and conversely. What people mean when they say no jobs are available is that none are at a “desirable” or mandated wage rate. Nothing is strange about this observation, because at some wage level anyone will find himself unemployable. For example, if the writer informed his employer that the minimum salary he would accept was $500,000 per year, there would simply be no job available for him at George Mason University. The difference between workers is that the wage that would cause some people to be unemployed is higher than that which would cause other people to be unemployed.
3. Many people are unemployed because they have few skills and other qualifications. Low skills can explain low wages but not unemployment. The history of blacks provides concrete evidence. A person is qualified or unqualified only in a relative sense—that is, relative to some wage. To speak of qualifications or skills in an absolute sense has little meaning. For example, a carpenter who is qualified, and hence employable, at a wage of $20 per hour, may be unqualified, and hence unemployable, at $35 per hour. This principle applies to everything. A Sears suit is “unqualified” to sell for the same price as a hand-tailored Pierre Cardin suit.
Consider this interesting aspect of skills and qualifications: if an organization of, say, carpenters can through legal institutions mandate that employers pay all carpenters hired a wage of $35 per hour, then they have artificially disqualified and made unemployable the carpenter who used to find work paying $20 per hour.
This kind of artificial disqualification applies directly to the problems minorities face in the labor market. It is frequently said that they have a high unemployment rate because of their low skills. In earlier times, however, minorities had much lower unemployment rates. No one would or could explain that in terms of blacks during those periods having more education and training than they now do. The real reason is that through the political mechanism (intentionally and unintentionally), many blacks have been made artificially unqualified.
4. Widespread automation causes high unemployment rates among a large sector of the labor force. First, increases in relative wages are a proximate cause of automation: when wages rise relative to capital costs, firms have incentives to substitute capital for labor. For example, when elevator operators successfully negotiated a higher wage, their success was followed, a few years later, by widespread installation of automatic elevators. After farm workers were brought under the minimum wage, we saw greater farm mechanization. Second, the automation-causes-unemployment argument assumes a finite number of jobs. The argument’s implication is that society has no use for the labor saved by machinery. The very reason nations raise their higher standards of living is a result of capital being used to replace labor, thereby freeing up that labor to undertake other tasks. For example, in 1800, it took 95 out of every 100 Americans to feed the nation. Today, it takes less than three. Workers no longer needed to farm became available to produce thousands of other goods—and did produce them, as the breadth of the U.S. economy expanded tremendously.
5. Higher minimum wages give workers increased purchasing power that in turn sustains high employment. This myth assumes that workers keep their jobs and work the same number of hours as before. Some workers will and some will not. Those who lose their jobs as a result of a hypothetical right to earn $5.85 an hour will find that the hypothetical right will not buy groceries and housing. Furthermore, higher wages are not the same thing as more purchasing power when the artificial wage increases give rise to political forces to create inflation.
6. The minimum wage law is an antipoverty weapon. If this were true, we would have an instant solution to the world’s poverty and underdevelopment problems. We would just advise countries to raise their minimum wage. The sad fact of life is that low-skilled workers are not so much underpaid as they are under-skilled. The way to help them is to make them more productive. This cannot be done with a stroke of the legislative pen.
7. The poor benefit most from minimum wage increases. The hard truths about the types of workers most likely to be employed at the minimum wage raise questions about the efficacy of the minimum wage law as an antipoverty tool. Eighty percent of all minimum wage workers live in non-poor households,[74] with almost 20 percent in households earning annual incomes above $50,000.[75] More than 50 percent of minimum wage earners are between sixteen and twenty-four years old, and more than 63 percent work part-time. Only 5 percent of all working adults are paid the minimum wage.[76]
These labor market myths have maintained their popularity down through the ages, primarily because they have served particular interest groups and because many other people are decent and concerned about the welfare of their fellow man—but without understanding economics. But truly compassionate policy requires dispassionate analysis, and the debunking of these and other labor market myths is an important means to that end.
The minimum wage law has imposed incalculable harm on the most disadvantaged members of our society. The absence of work opportunities for many youngsters does not only mean an absence of pocket money. Early work opportunities provide much more than that: important insights on how to find a job and to adopt proper attitudes toward both, punctuality, and respect for supervision in the workplace. Lessons of that sort learned on any job help make a young person a more valuable and successful worker in the future. In addition, early work experiences give youngsters the pride and self-respect that come from being financially semi-independent. That is even more important for black youngsters, a disproportionate number of whom grow up in female-headed households and go to the nation’s worst schools. If they are to learn job-related lessons, many of them will be learned through a job.
The Minimum Wage Vision
We observe people who share identical goals advocating different public policies, and quite often the policies produce unintended consequences. Many who profess concern for the welfare of low-skilled workers advocate higher minimum wage laws. Others, citing an identical concern, oppose higher minimum wage laws. One question we might ask is, how can honest and intelligent people, without a self-serving purpose, arrive at polar-opposite policy conclusions? The answer is that conclusions often depend on one’s vision of how the world operates. For example, if one’s initial premise, stated or not, is that an employer must hire a certain number of workers to do a particular job, the logic behind increasing the minimum wage law as a means to raise incomes of low-skilled workers is impeccable. According to that vision, the minimum wage’s only effects are higher wages for workers and lower profits for employers.[77]
That is a particularly optimistic vision of minimum wage laws. A higher minimum wage implies higher costs, but higher costs affect employment per se as well as wages and profits. They also affect the attitude of the firm’s investors, who worry about return on equity. And if product prices are increased, the attitudes of both investors and customers may well turn negative. In other words, the vision falsely assumes that customers will not seek cheaper substitutes and will purchase the same quantities after the price increase as before, resulting in no negative impact on employment.
By contrast, other people start with the premise that employers are responsive to changes in the price of labor, stockholders are responsive to changes in equity value, and customers are responsive to product prices. These people may have just as much concern for the welfare of the low-skilled but nonetheless argue against increases in the minimum wage law. They see that employer responses to higher wages include: substitution of capital for labor (automation); employment of self-service techniques; relocation in a part of the country or the world that offers lower labor costs; and other measures that economize on the use of labor. Holders of this vision argue that mandated wage increases that exceed worker productivity will discriminate against the employment—and the on-the-job training—opportunities available to the lowest-skilled worker.
The view that ignores or perceives no response to changes in wages is what economists call zero elasticity of response. The vision it involves perceives that changes in the independent variable (wages) have no effect on the dependent variable (the amount of labor hired). This vision, in the public policy arena, has produced disastrous consequences.
Invisible Victims
Much of the political support for higher minimum wages reflects self-interest. It is, as we have discussed, a way for some workers to reduce competition with low-wage earners. Many others support minimum wage legislation because of an honest concern for the disadvantaged worker. They see people working under poorly paid, “sweatshop” conditions. They may see old women or illegal aliens working ten hours a day for $2 or $3 an hour. Having made these observations, they may summon the Department of Labor or report the employer to the Immigration and Naturalization Service. The factory owner may be fined for violations of wage-and-hour and immigration laws.
Having brought this action, do-gooders walk away triumphantly, thinking that justice has won over evil. Six months later, if they return to the factory, the people they see working are better off. They are earning the minimum wage and have better working conditions. This gives affirmation to the activists’ sense of accomplishment.
What the do-gooders don’t see are the people—the illegal aliens, the old women, the teenagers—who no longer have a job. The illegal may be back in Mexico, living under worse conditions. The old woman may be no longer earning any wage, and the kid may be on a street corner committing a crime. These are the invisible victims of the advocates’ actions. Neither the victims nor their advocates make a connection between their worsened condition and increases in the minimum wage. Victims do not know why they cannot find a job, and are likely to chalk it up to “bad times” or racial discrimination rather than higher minimum wages.
Before the do-gooders “helped,” they forgot to ask, why would anyone work ten hours per day for the paltry sum of $2 or $3 an hour? Would they have selected such a job if they had superior alternatives? The only conclusion is that the low-paying sweatshop job might be their best alternative. Such a person is indeed unfortunate, but they are by no means made better off by the destruction of that low-paying job.
The real problem is that workers are not so much underpaid as they are under-skilled. And the real task is to help those people become skilled. Congress cannot do this simply by declaring that as of such-and-such a date, everybody’s productive output is now worth $7.25 per hour. This makes about as much sense, and does just about as much harm, as doctors “curing” patients simply by declaring that they are cured.