Thomas Sowell on the Cruelty of Minimum Wage Laws

The video above features the reading of a section of Thomas Sowell’s 1980 book Knowledge and Decisions where the brilliant economist explains some the economic dynamics of minimum wage laws. Here’s a key excerpt starting at about 4:51 in the video:

There is no inherent reason why low-skilled or high-risk employees are any less employable than high-skilled, low-risk employees. Someone who is five times as valuable to an employer is no more or less employable than someone who is one-fifth as valuable, when the pay differences reflect their differences in benefits to the employer.

This is more than a theoretical point. Historically, lower skill levels did not prevent black males from having labor force participation rates higher than that of white males for every US Census from 1890 through 1930. Since then, the general growth of wage-fixing arrangements: minimum wage laws, labor unions, civil service pay scales, etc. has reversed that and made more and more blacks unemployable despite their rising levels of education and skills: absolutely and relative to whites.

And here’s the “money quote”:

In short, no one is employable or unemployable absolutely, but only relative to a given pay scale.

And that highlights the essence of the economic logic that explains why the most vulnerable workers (low-skilled, uneducated, teenagers, etc.) are the group that is most harmed by minimum wage laws — those laws artificially raise the wages of low-skilled workers without increasing their productivity, and therefore significantly reduce their employability relative to higher-skilled workers.

For example, in the study from the team of researchers at the University of Washington on Seattle’s $15 an hour minimum wage, they reported (emphasis added):

Our preferred estimates suggest that the Seattle Minimum Wage Ordinance caused hours worked by low-skilled workers (i.e., those earning under $19 per hour) to fall by 9.4% during the three quarters when the minimum wage was $13 per hour, resulting in a loss of 3.5 million hours worked per calendar quarter. Alternative estimates show the number of low-wage jobs declined by 6.8%, which represents a loss of more than 5,000 jobs.

The work of least-paid workers might be performed more efficiently by more skilled and experienced workers commanding a substantially higher wage.

Bottom Line: Thomas Sowell’s comments illustrate an economic reality that is frequently overlooked: Workers compete against other workers (not employers) to find jobs and get the highest wages. Employers compete against other employers to find the best workers. In other words, low-skilled workers compete against high-skilled workers in the labor market. Low-skilled workers who would be employable at a low wage become unemployable at an artificially higher wage. And that explains the perverse cruelty of minimum wage laws: it inflicts the greatest harm on the very workers it is allegedly designed to help.

Update: From the Wall Street Journal’s editorial board today “Seattle Workers Pay for the Minimum Wage“:

The real and eternal lesson is that political wage-setting hurts the least skilled and lowest-paid workers, as the evidence in Seattle shows.