It seems everyone in government today is talking about job creation. The only problem is, government does not create jobs, it only can create an environment that may or may not encourage job growth.

You may be thinking the government can add a new IRS agent, “Yay! Government created a new job!” But in reality, for government to “create” this job, it removed the means of production, or capital, from the private market to do so. In other words, the government merely redistributed the job from the private sector to the government through taxation unless the government is paying this new employee through perpetual debt, and then there may be a case. Though the case would have significant consequences since government employees generally do not create anything of value that could potential improve business revenue, thereby adding value that eventually adds tax revenue to pay for the perpetual debt caused by the new employee. Hence, the government does not create jobs; it only removes capital from the private sector that creates jobs.

So let’s discuss one job-destroying policy and why President Obama still has at least one legitimate reason to blame President Bush for the state of the economy-the federal minimum wage.

Minimum wage is an artificial wage floor created by legislation. We could certainly question its constitutionality, but that is for another day. The impact of a minimum wage is significant. Let us look at some of the areas of impact.

The value of labor differs significantly state to state and market to market.
It should be easy for all to see that that value of labor from Rawlins, Wyoming is not comparable to San Francisco, California nor is it from Garden City, Kansas to New York, New York. Assuming the correct wage could be legislated, there is no way that one blanket wage could accurately apply across all areas of the United States.

The values of all higher wages are effectively reduced.

If you make $10 per hour and the minimum wage is increased from $6.55 per hour to $7.25 per hour (a 10.7% increase), as it was last year, your $10 per hour is now effectively worth less even though you still make $10 per hour. However, in practical terms, all of the means of production that rely on minimum wage labor have had a 10.7% cost increase. Since companies must make money to remain in business, this increase in cost will be passed along in price. So you continue to make $10 per hour, but many of the commodity items you commonly buy, such as groceries, have increased in cost. Although you likely will not feel the full 10.7% burden, you will experience a burden, thereby diluting your buying power, effectively reducing your wages that you can now buy less with.

The total number of jobs are reduced through elimination.
If a company decides it cannot be competitive by raising prices to pass along increased labor cost, then it will simply eliminate jobs and ask more if its current employees or accept reduced quality in its product or service. As a practical example, I bagged groceries in high school. We were required to carry them out to the car of the customer. This was considered an expectation at the time at nearly every grocery store. Now, this service is rare. The reason is simple. Minimum wage has increased 70.6% since the early 1990s to today. Bagging groceries and carrying them out is a low-skilled job. The market simply does not bear $7.25 per hour in most markets for this service.

The youth of this country are no longer working and do not learn a work ethic.
Many of my friends and colleagues in industry are very frustrated by the work ethic of the rising generation who has recently graduated from college. This is because more new graduates than ever before have never held a job in their lives. One of the primary reasons for this is the minimum wage. Unskilled and often unreliable teenagers simply aren’t worth $7.25 per hour in most markets. As of August 2010, teenage long-term unemployment is 23.5%. If young people who want to work cannot find jobs, it is very likely that we are breeding a generation without a work ethic.

The total number of jobs are reduced through off-shoring.
One of the most tired arguments during the recently completed political campaign season was “so-and-so supported sending jobs overseas”. If Americans were serious about not sending jobs overseas, they would stand up to costly regulations, policies, and laws such as the minimum wage, that only incentivize businesses to eliminate jobs in the US and send them to low-cost countries overseas. When a company can acquire labor for say 10% of the cost in the US plus another 60% in shipping expenses (including all costs, such as tariffs), netting 70% of total labor cost (caution, don’t get caught up in hourly wage comparisons, you must compare total landed cost), it is a no-brainer to move jobs oversees.

Thus, you can see how destructive artificial minimum wage amounts created legislation can be. Jobs are certainly eliminated entirely or entirely moved overseas. When the total number of jobs available is reduced, increased rates of unemployment will inevitably follow. You can see this trend in the following chart:

Unemployment and Minimum Wage

Hat tip: Stossel

The answer is to eliminate all federal minimum wages. Even the ultra-liberal New York Times earlier this year ran an op-ed discussing the negative impact of increased minimum wage on jobs. Free markets should decide wages. No one is forced to take a wage they are not willing to accept. On the other hand, if an employer cannot fill a position at a certain wage level, the market will have signaled to him that he is offering to little and will increase the wage offered. Further, if the individual states want to create their own minimum wages, they may do so (to their own destruction). Indeed, fourteen states have a minimum wage higher than the federal minimum today. Without a federal minimum wage, instead of jobs fleeing the country, they will simply leave the states with minimum wages mandated above market rates.

Now you can see why President Obama does have a legitimate claim against President Bush for the current level of unemployment. It was President Bush who signed into law the stepped minimum wage increases that took effect from 2007-2009 that netted a 40.8% higher wage of $7.25 per hour from the previous $5.15. However, if President Obama does nothing to repeal the minimum wage law, and this class-warfare President will not, he by default accepts responsibility for its destructive impact on the economy and has now become responsible for the worst employment record in the United States since President Jimmy Carter.

Comments

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  • http://scottslant.blogspot.com/ Scott A. Robinson

    You are right about the multiple levers in the economy and there was a financial crisis. So which is it, are there multiple levers or was the financial crisis solely responsible? If there are multiple levers, it absolutely feasible that the minimum wage increase is one of them.

  • Edgar

    Before I comment on this article I want to relay a personal experience and then bring it back on topic. When I was in my teenage years I thought I knew almost everything you needed to know about computers. I was always anxious to demonstrate my “superior” knowledge about computers, and in so doing I would often times expose my ignorance. Now that I have a bachelor’s degree in Computer Science, and 7 years experience as a Software Developer I’m embarrassed by my arrogance as a teenager. Furthermore even though my knowledge about computers vastly surpasses my knowledge as a teenager, I no longer believe that I know everything there is to know about computers. I have been exposed to the vast complexities that are inherent in computer systems and software, and I’ve been humbled by it.

    The economy is a system that is composed of all of the economical decision of each individual that participates in the economy. You can’t so much as blow your nose, or drive your car without interacting with the economy. You can’t even read this blog without having some impact on the economy. Every little decision you make has an impact on someone else’s life. Conversely every decision everyone else makes has some small impact on your life. The economy is a tightly coupled, highly complex system, vastly more complex than any computer system out there.

    What surprise me more than anything is how so many people think they have a perfect understanding about the economy. Some say: “If you don’t extend the Bush tax cuts our economy will suffer”. Really? You’re absolutely sure about that? Why is it that out of the eleven options of stimulating the economy the C.B.O. investigated extending the Bush tax cuts came in at number eleven? Conversely how can the C.B.O. be so certain? Others will say: “The Obama stimulus bill created or saved 3 million jobs”. How did you come to that? Oh you re-entered the data back into your models that you used to calculate the job savings before the stimulus package was passed, and the results came back the same, imagine that. It is for this reason that I have become incredibly skeptical when anyone talks about the economy in terms of absolutes. An Economist that cannot admit his limited understanding about a complex system is probably not much of an Economist at all.

    So back to your article. I have tendency to disagree with you so much that I’m going to start off with what I do agree with you on. I’m no fan of minimum wage. At best minimum wage is a necessary evil.

    The only way I can see minimum wage justified is in industries that are run by relatively few companies. When only a few companies control an industry those companies will have far less competition when it comes to hiring up new employees. The result is wages are driven down, and the people in the higher echelons of the companies are able to take more than their fare share in wages.

    Even in this situation minimum wage is a bad solution. Minimum wage is applied to all industries; including those industries that have plenty of competition. It may be that workers in one industry still make above minimum wage, but continue to be grossly underpaid.

    A better solution would be organized labor. With organized labor all of the workers band together to demand better compensation. If the employers believe that their employees are demanding too much they can just look for help elsewhere. If the employees really are being underpaid for their skills then the employer will have a difficult time replacing them, and will eventually have to negotiate better compensation for the employees.

    Probably my favorite solution is creating an environment for competition by promoting small businesses. I prefer small businesses to huge oligopolies for a variety of reasons, and one of those is small businesses can compete with each other for talent resulting in fair wages for the employees.

    The problem facing small businesses is industries tend to converge on an environment where just a few large companies control the entire industry. Often times there are so many positive feed back loops in an industry that this conversion towards oligopolies happens very quickly. We can look at the rise of Google and Microsoft as perfect examples of this trend. The only way I know of to prevent this trend is to put in place a regulatory framework that allows small businesses to grow (I believe this is the part where people on the right are supposed to call me a Socialist; even though I’m making an argument for competition).

    Once again minimum wage actually gets in the way of small businesses. Many times a small business has such humble beginnings that it depends on low wage employees before it can grow big enough to offer opportunities for higher wage workers. Let’s take a fast food restaurant as an example. When a fast food restaurant first starts up it will require low wage workers to run the kitchen and take orders. If that restaurant is allowed to grow it will eventually need high level executives, accountants, logistical experts, and software engineers, all high paying positions. Unfortunately an ill timed minimum wage hike could easily topple that restaurant before it can offer those high paying positions.

    Now to the point of our disagreement. You try to make the case that the minimum wage hike is directly responsible for our economic woes. You even have a nice graph to illustrate this point. I’ll give you points for creativity, but you lose points for accuracy. The trend that corresponds much better to our economic woes is the Financial Meltdown that took place in 2007.

    Financial Meltdowns are always nasty. The financial system is responsible for translating savings in one part of the economy into investments in another part of the economy. When this system comes apart the life blood of our economy is constricted, and the economy refuses to grow. Unfortunately once the financial system has fallen apart it becomes very difficult to stop the impending economic catastrophe. By all accounts we should have gone into a second great depression. The best explanation we have for dodging another great depression is TARP. I hate TARP just as much as the next guy. TARP bailed out the hoodlums that drove our economy off the cliff. It also kept us out of another depression, talk about a necessary evil.

    Obama may actually owe George W. Bush for keeping the economy from falling into the downward spiral of a Great Depression, but can he blame Bush for getting us there in the first place? In short, yes. He can also blame Bill Clinton, and Ronald Reagan. The massive deregulation that was promoted with crusade like vigor from the Reagan administration finally reached its climax in the Clinton administration in 1999 when the Glass-Steagall act was repealed. This deregulation allowed for investment banks to abuse derivative trading, and led to the orgy of irresponsible home mortgage lending that took place from 2000-2007 in order to satisfy Wall Street’s insatiable appetite for mortgage backed securities and CDOs. This dynamic quickly morphed our financial sector into a self feeding pyramid scheme. When housing prices finally reached levels so high that no one could afford to purchase a home, the bottom fell out and our nightmare began. Of course the whole story is a bit more complicated than that. Johnson and Kwak take over 200 pages to explain what happened in their book “13 Bankers”. The short answer is had we kept financial regulations in place we would not be having this discussion. We might be in a minor recession, but it wouldn’t be the mess we’re in now.

    So I guess the question is why hasn’t Obama gotten us out of this mess? After all he’s had an entire twenty months to undo the results of 30 years of bad regulatory policy. I suppose the main reason is Obama lacks super human abilities. Financial crises tend to last around four years, and they’re usually followed by a pretty anemic recovery. Such is the situation we find ourselves in today. In fact many economists don’t think we’ll start seeing major improvements for another 5 years. This isn’t because the don’t approve of Obama’s policies, it’s because the financial crises was actually that bad.

    I suppose this is more than just a comment. It may be worth a post all by itself. In fact will you save this? I think I might post this on my blog. Of course when reading this feel free to refer to paragraph one of this posting.

  • Whodat

    We can correctly blame Bush for President Obomb.

    I never want to miss the chance to give credit where credit is due.

    I wonder if, in Bush’s doo-fuss book, if he ever acknowledges that he, above all, set the table for this socialist nit-wit vacationer-in-chief…

    As long as Charmin still makes toilet paper, I will have no need of Bush’s book!

  • http://www.politicalderby.com/ Jason Wright, Editor

    Speaking of unemployment… Nice piece, SR.

    • http://scottslant.blogspot.com/ Scott A. Robinson

      Ha! Thanks.

  • http://www.wildfiretreasures.com/ Troy La Mana

    If you keep raising the minimum wage you are limiting the number of entry level jobs that businesses will create and it cuts into promotions and bonuses.