A minimum wage fable by Mark Perry

Dr. Mark Perry spoke at American Experiment's BIG minimum wage debate that drew over 200 people.
Dr. Mark Perry spoke at American Experiment’s BIG minimum wage debate that drew over 200 people.

[This is a great post from Dr. Perry’s Carpe Diem blog.]

[The full 60 min. audio from American Experiment’s BIG minimum wage debate with Sen. John Marty, Dan McElroy, and Dr. Perry is available here.]

Consider an imaginary economy with two types of workers: two-armed and one-armed. Two-armed workers are the large majority, while the one-armed workers are a small minority. For most manual tasks and some service-related jobs, suppose the one-armed workers are realistically less productive than their two-armed counterparts for: a) agriculture jobs like manually picking vegetables and fruits, b) construction and maintenance jobs like carpentry, electrical wiring, roofing, window washing, shoveling snow, moving construction materials, painting, tuning pianos, etc. and c) some service-related jobs like word processing, cutting hair, physical therapy, massage, cooking, dish-washing, busing tables, moving furniture, stocking shelves, etc. Further suppose that research shows that one-armed workers are about 25% less productive on average than two-armed employees and that difference in productivity is reflected in market wages – one-armed workers are paid 25% less on average than their two-armed counterparts.

Suppose further that the imaginary economy’s current minimum wage law reflects the differences in worker productivity with a $10 an hour minimum wage for two-armed workers and a $7.50 an hour minimum wage for the less productive one-armed workers.

But along now come progressive politicians and labor unions in this imaginary world who object to the two-tiered minimum wage law because it allegedly discriminates against one-armed workers. Out of a sense of fairness, compassion, and social justice, politicians and labor unions demand a single $10 an hour minimum wage for all employees regardless of their productivity and “arm status.” Suppose that on behalf of their one-armed constituents, politicians successfully enact a single $10 an hour minimum wage that applies to all workers.

Q: What are the predictable outcomes of such a minimum wage law for the one-armed workers in this imaginary economy who the law is intended to help? Here are four such outcomes:

1. One-armed workers now find themselves priced out of the entry-level labor market and employers will only hire two-armed workers at $10 an hour. The main advantage that one-armed workers had before – being willing to work at a 25% discount compared to two-armed workers for entry level positions – has been taken away from them.

2. To paraphrase Milton Friedman, the $10 an hour minimum wage law described here is most accurately described as a law saying that employers must now discriminate against one-armed workers. Employer demand for one-armed workers will fall significantly, and fewer one-armed workers will be employed. Because fewer one-armed workers are employed, the unemployment rate for one-armed workers will increase.

3. For one-armed workers who are able to keep their entry-level jobs (or find a job) at the new higher uniform $10 an hour minimum wage, they may find that their hours have been reduced, and/or that their previous fringe benefits (employee discounts, reduced-cost or free food if they work at a restaurant, free uniforms, tuition benefits, paid holidays, etc.) have been reduced or eliminated as employers try to offset the 33.3% increase in their monetary labor costs to employ one-armed workers (that is not accompanied by an increase in worker productivity).

4. Overall, many one-armed workers will be unable to find work at the $10 an hour minimum wage, and will therefore not be able to gain the skills, on-the-job training, and work experience that would allow them to move up to higher-paying jobs that require previous work experience. In other words, many one-armed workers would face significant adverse, long-term consequences from the single $10 an hour minimum wage law that could last for decades.

Bottom Line: In the fable above, we can replace “one-armed workers” with different terms like “immigrant workers” or “entry level workers” or “unskilled workers” or “minority workers” or “teenage workers” or “limited experience workers” to understand how those real-life workers – even with two arms – are (or will be) harmed by the $15 an hour minimum wage laws that are becoming increasingly popular in the US. As Milton Friedman observed many decades ago, and as this fable helps to illustrates, programs like a $15 minimum wage that are designed to help the poor and disadvantaged always have effects exactly the opposite of those their well-intentioned sponsors intend them to have. Just like the one-armed workers in the fable above would be harmed by the well-intentioned minimum wage law, unskilled, limit-experienced workers today, especially minorities, will be harmed by a $15 an hour minimum wage.

The main point of the fable above is also illustrated graphically below in these two cartoons by Detroit News cartoonist Henry Payne (reprinted with his permission).