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.

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