Why Minimum Wage Represents Maximum Stupidity

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[Editor's Note: The federal minimum wage increases to $7.25 an hour on July 24.]

By Peter D. Schiff
Guest Columnist
Money Morning

In a free market, demand is always a function of price: The higher the price, the lower the demand. What may surprise most politicians is that these rules apply equally to both prices and wages. When employers evaluate their labor and capital needs, cost is a primary factor. When the cost of hiring low-skilled workers moves higher, jobs are lost. Despite this, minimum wage hikes, like the one set to take effect later this month, are always seen as an act of governmental benevolence. Nothing could be further from the truth.

When confronted with a clogged drain, most of us will call several plumbers and hire the one who quotes us the lowest price. If all the quotes are too high, most of us will grab some Drano and a wrench, and have at it. Labor markets work the same way.

Before bringing on another worker, an employer must be convinced that the added productivity will exceed the added cost (this includes not just wages, but all payroll taxes and other benefits). So if an unskilled worker is capable of delivering only $6 per hour of increased productivity, such an individual is legally unemployable with a minimum wage of $7.25 per hour.

Low-skilled workers must compete for employers' dollars with both skilled workers and capital. For example, if a skilled worker can do a job for $14 per hour that two unskilled workers can do for $6.50 per hour each, then it makes economic sense for the employer to go with the unskilled labor. Increase the minimum wage to $7.25 per hour and the unskilled workers are priced out of their jobs. This dynamic is precisely why labor unions are such big supporters of minimum wage laws. Even though none of their members earn the minimum wage, the law helps protect their members from having to compete with lower-skilled workers.

Employers also have the choice of whether to employ people or machines. For example, an employer can hire a receptionist or invest in an automated answering system. The next time you are screaming obscenities into the phone as you try to have a conversation with a computer, you know what to blame for your frustration.

There are numerous other examples of employers substituting capital for labor simply because the minimum wage has made low-skilled workers uncompetitive. For example, handcarts have replaced skycaps at airports. The main reason fast-food restaurants use paper plates and plastic utensils is to avoid having to hire dishwashers.

As a result, many low-skilled jobs that used to be the first rung on the employment ladder have been priced out of the market. Can you remember the last time an usher showed you to your seat in a dark movie theater? When was the last time someone other than the cashier not only bagged your groceries, but also loaded them into your car? By the way, it won't be long before the cashiers themselves are priced out of the market, replaced by automated scanners, leaving you to bag your purchases with no help whatsoever.

The disappearance of these jobs has broader economic and societal consequences. First jobs are a means to improve skills so that low skilled workers can offer greater productivity to current or future employers. As their skills grow, so does their ability to earn higher wages. However, remove the bottom rung from the employment ladder and many never have a chance to climb it.

So the next time you are pumping your own gas in the rain, do not just think about the teenager who could have been pumping it for you, think about the auto mechanic he could have become – had the minimum wage not denied him a job. Many auto mechanics used to learn their trade while working as pump jockeys. Between fill-ups, checking tire pressure, and washing windows, they would spend a lot of time helping – and learning from – the mechanics.

Because the minimum wage prevents so many young people (including a disproportionate number of minorities) from getting entry-level jobs, they never develop the skills necessary to command higher-paying jobs. As a result, many turn to crime, while others subsist on government aid. Supporters of the minimum wage argue that it is impossible to support a family on the minimum wage. While that is true, it is completely irrelevant, as minimum wage jobs are not designed to support families. In fact, many people earning the minimum wage are themselves supported by their parents.

The way it is supposed to work is that people do not choose to start families until they can earn enough to support them. Lower-wage jobs enable workers to eventually acquire the skills necessary to earn wages high enough to support a family. Does anyone really think a kid with a paper route should earn a wage high enough to support a family?

The only way to increase wages is to increase worker productivity. If wages could be raised simply by government mandate, we could set the minimum wage at $100 per hour and solve all problems. It should be clear that, at that level, most of the population would lose their jobs, and the remaining labor would be so expensive that prices for goods and services would skyrocket. That's the exact burden the minimum wage places on our poor and low-skilled workers and, ultimately, on every American consumer.

Since our leaders cannot even grasp this simple economic concept, how can we expect them to deal with the more complicated problems that currently confront us?

[Editor's Note: Peter D. Schiff, Euro Pacific Capital Inc.'s president and chief global strategist, is a well-known author and commentator, and is a periodic contributor to Money Morning. Schiff is the author of two New York Times best sellers: "Crash Proof: How to Profit from the Coming Economic Collapse," as well as "The Little Book of Bull Moves in Bear Markets." For a more-detailed look at the United States' ongoing financial problems - and for some strategies that will help you protect your wealth and preserve your purchasing power before it's too late - download EuroPac's brand-new free special report, "Peter Schiff's Five Favorite Investment Choices for the Next Five Years."

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  1. traineeinvestor | July 13, 2009

    Can you spell "outsourcing"?

    In an envronment where jobs are scarce and unemployment rising, making it more expensive to hire employees is, as you say, an demonstration of "maximum stupidity".

    Next up….let's have more protectionism, higher taxes and …. oh, wait….those are being implemented already. Lenin would be giving these clowns a standing ovation.

  2. john w johnson | July 13, 2009

    Peter, I feel sorry for you. You are so stuck in a purely linear mode of thinking. The divide between the wealthy and the common laborer have been so severly skewed in the last decade(s) that we can't see straight.
    I own a small company, and i don't think like you. Another point of view, is that I'm making plenty to get by. And my workers are struggling to pay the rent. I don't care if my coffers have a little less money. I like the idea that more of us can get up in the morning and feel good about going to work.
    Your model is a part of the problem. It's all about the bottom line. And it's killing us all.
    Until we start realizing some age old principles, ie, we are all connected, your patriarchal attitude will continue to cause pain and sufffering.
    And living in your gated community with your security systems alienates you from the rest of the world. It keeps you in the mindset of us against them. Of having to protect yourself from "those people" who want what you have.
    My prayers go out to you. And for all of us.

  3. Paul Mannstein | July 13, 2009

    Why don't we apply this same logic to incompetent CEOs and other fat cats and not give them obscene bonuses and perks even as they destroy share holder value ultimately driving the companies they are supposed to manage into Chapter 11. Why not pay workers even less so that they cannot afford to put food on the table for their families. Industries will go out of business for a lack of customers which ought to bring back the economy big time!

  4. John Boyer | July 13, 2009

    I don't understand why the politicians can't see why increasing minimum wage is not a good idea. I call this "idiotic compassion".
    Also, as the increased minimum wage forces the cost of goods and services higher it makes it EVEN HARDER for the person on minimum wage to buy goods and services, — a bigger problem for them than for someone who is more affluent. The person on minimum wage gets a little bit more money but he has a "hundred" places where he has to pay more. The little extra he gets is quickly "gobbled up"!

  5. Rudy | July 13, 2009

    The jobs you speak of were lost not because of the minimum wage, but because of technology. And I don't know of any "paperboys" that exist anymore, let alone earning minimum wage. These are all adults with autos who do this to supplement their income. As for the pump jockeys, those "mechanics" are gone also. With automobiles being computerized, you're not going to learn by hanging out with a mechanic. I agree with Mr. Johnson that you are out of touch. And getting estimates for a clogged drain is wise. But the lowest price is not always the best option. And doing it yourself could cost you even more if you don't know what you're doing. And people don't need an usher in a theater. These are all poor examples. Bottom line is, the bottom line is what matters. If employers can get one person to do 3 peoples jobs, then they will let 2 people go.

  6. Mary L | July 13, 2009

    I agree with Mr. Johnson. Far too many people have no idea what it takes to do most of the necessary jobs out there.

    Too many have never come up through the ranks. It used to be a mark of pride for the owner or president of a company to make his kids work in the company starting at the bottom – to not only learn the business from the bottom up, but to learn what it takes to actually do those jobs.

    It also used to be a BAD THING when a company laid off workers. Everyone knew it meant that there were going to be FEWER people able to SPEND money. A company's stock went DOWN as a consequence. This was before the corporate machine convinced our so-called leaders to allow them to outsource our manufacturing base to cheap foreign labor at the expense of our national security and economic health. Of course, that was before most people thought they could live on credit forever. Now we have virtually no industrial base that brings $ in. Now we have a service based country and can't pay the nation's bills! Surprise, surprise!

    I've been working since I was 16. I learned early on how to budget AND say no to myself when I could get by without buying that new toy in the window. I'm financially in good shape as a result. Unfortunately, now we're all screwed because of a refusal by far too many to share some of the wealth, not to mention the excessive greed that allowed Madoff to make his killing.

    We need people who ask the tough questions and make sure we get good solid logical answers. That's called discipline and due diligence. What we have been lacking in the public and private sectors is exactly that. Too many who tried to simply do their jobs were told not to upset the apple cart. Maybe now that so many haves – have lost so very much, our society will start remember that greed is NOT good. Far too many people think they are entitled to far too much.

    As for protectionism, traineeinvestor, the U.S. has probably been the only truly free market. You have obviously failed to notice that every other country in the world is and has been practicing protectionism at the expense of the U.S. for the last 20+ years. Can you say NAFTA? I can still hear that sucking sound. Don't you hear it, especially now? When too large a majority of your own people can't make what is considered a living wage, then YOUR SOCIETY IS IN IT DEEP. It's up to the thoughtful, civilized adults in any society to teach the kids to share. Where are the adults?

    Just how much do you have to make that you actually begrudge anyone $7.25 an hour? Could you live on that even for a month? I'd have a lot of trouble doing it and I believe in living life reasonably.

    I'm not being politically correct here. I'm being a rational adult who understands that we sink or swim together. When your neighbors make a good living – your property values go up. When your neighbors can't make a decent living – property values go down. Do you really want to move out of the neighborhood? Try living in China. Stop expecting all of the perks of living in an established civilized country without paying the price.

  7. Debbie Wright | July 13, 2009

    Peter is not saying that is the right way to go, but he is pointing out the reality of what happens. It would be great if all owners of big businesses thought that way, but unfortunately most do not know their workers, and don't think like them. And, also, they think about keeping costs down (which also may mean lower costs for everyone else).

  8. willieR. | July 13, 2009

    Thank you#2!!….and to add just a bit…remember…there are a LOT MORE of 'them'…then there are the well to do…

  9. Bill Howland | July 13, 2009

    While I'm a client of his firm, and normally concur with Mr. Schiff, I think here, he's being a bit too cold.

    A perfect society does not exist in America at the moment, and there is painfully little capitalism allowed by our current government. Under such circumstances, Labor Unions are a tolerable necessary evil. And, the combination of a Labor Union, and a Big Business is not necessarily a totally lost cause.

    It's a question of proportion…. The big money-center banks are in the process of robbing the wealth of all the little people, and not-so-little people who are unaware of what is transpiring. Paying 20-30% more for what is typically 'higher-quality labor' does not put American Manufacturers at so much of a disadvantage as the many other government mandated restraints on them.

    I'm not taking it too much out – of – context when I quote the Biblical Admonition, "The worker is worthy of his Wages".

  10. Michael Petyo | July 13, 2009

    I read both comments above about the minimum wage issue. I would like to point out that when I was younger I wanted to learn how to be a Bar Tender. So I applied and offered my services to learn and work for free. Yes you read it right I worked for free just to learn the trade. Needless to say I learned to tend bar and the opportunity arose for me to move into the position of getting paid. I know that everyone is not in the possition of working for free, but if you want something bad enough you will do what it takes to get that position.
    I read the article about minimum wage and I would have to agree. We need to get the Government off of are backs and out of our lives.

  11. Cornelius | July 13, 2009

    Peter you're conveniently hidding the thruth.
    What about the limitless greed of corporations' CEOs ? What about Wall Street corruption ? What about the widening gap between haves and have nots ? If all our super rich and super wealthy would agree to make just a few less $$$ Millions a year (JUST A FEW !!) then our economy and our society would be in a much better shape…
    God bless….

  12. john w johnson | July 13, 2009

    Peter, I feel sorry for you. You are so stuck in a purely linear mode of thinking. The divide between the wealthy and the common laborer have been so severly skewed in the last decade(s) that we can't see straight.
    I own a small company, and i don't think like you. Another point of view, is that I'm making plenty to get by. And my workers are struggling to pay the rent. I don't care if my coffers have a little less money. I like the idea that more of us can get up in the morning and feel good about going to work.
    Your model is a part of the problem. It's all about the bottom line. And it's killing us all.
    Until we start realizing some age old principles, ie, we are all connected, your patriarchal attitude will continue to cause pain and sufffering.
    And living in your gated community with your security systems alienates you from the rest of the world. It keeps you in the mindset of us against them. Of having to protect yourself from "those people" who want what you have.
    My prayers go out to you. And for all of us.
    Should say excellent post. Can't wait to reading the next one!

  13. John Boyer | July 13, 2009

    Mr. John W. Johnson,

    You seem like a man of compassion.
    If more employers had your attitude it would help us all. But I still think that by expanding the minimum wage we add hardship to the whole economy — if we can't afford things now, how can we afford them if products and services are much higher. If minimum wage goes up probably your employee's rents will go up, also. So why not keep the minimum wage where it is for now, and employers like you CAN pay more. Of course, minimum wage is really just one of the "weeds" of our society. The root of the problem is within the heart of man, selfishness and greed, no?

  14. Don Fishgrab | July 13, 2009

    A minimum wage hike is only a temporary boost for the minimum wage earner. The increase causes an immediate increease in take home pay, but it also produces an increase in the employer's labor cost, both in increased wages, and in increased payroll taxes. A one dollar increase in wages increases expenses by $1.25 to $1.50, That makes the cost of their products increase, which is passed along to the consumer. The increased cost of materials requires an additional price increase. The benefit of the minimum wage increase is only felt until the adjustments to prices are made. Ultimately, minimum wage is the same percentage as it originally was, and the low man is in exactly the same position as before.

    Most owners base their earnings on a percentage of cost, and at any point, they experience losses only if the increases reduce sales. Workers in in between jobs come out as the biggest losers, as the cost increases hit them before their wages increase. They must have a wage increase of the same percentage to maintain the same standard.

    There is nothing in a minimum wage increase to reduce the gap between the highest and lowest paid. It only occurs if ownership is willing to settle for less profit. Many are not.

  15. Bruno Vartuli | July 14, 2009

    minum wages are stupid in a democracy system. We can be comunist society or democrasy. we can't be both at the same time. In the old days people lived in rural area earned their living from working their land. Now governments and employers are responsable for people living. Sorry, I mean tax payers have to support people living? But, hang on! people that haven't have to live at the expences of people that have! One way or another. Safety fences and high sophisticated security would not promote pacific living.

  16. Robert | July 14, 2009

    The real fun begins when deflation starts hitting and turns that $7.25 an hour into $72.50 an hour in today's terms, then $362.50/hour, then $725/hour, then $3625/hour in today's terms, as surviving dollars buy 10, 50, 100, or 500 times as much as today. The minimum wage law, started with the explicitly stated goal in its minutes of "keeping blacks from taking the jobs of whites" back in 1930, if not abolished or adjusted for deflation, will make it prohibitively expensive to hire ANYBODY by the time deflation is over. A deflationary depression should wipe out the insanity (among other things).

  17. Gazza | July 14, 2009

    You have to ask yourself about your peers. (check out the profile link). there are two problems around most of the world, you have some people earning stupendious amounts, and then those stuggling to earn a decent modest living nothing more just enough so they are happy. Now ask how much the cleaners in your company are getting paid. go and do that now, and compare that to the amount you are getting paid. See the problem. Now how easy is it to fix considering the amount you would need to shift in wage balance to give them a decent it is not that hard. The huge problem is world wide that there are too many greedy people at the top of their company who do not share out the company earnings properly and only worry about themselves.

  18. Lori | July 14, 2009

    Mr. Johnson and the others who agree with him…wake up. I'll take your word that you are a different sort of business owner — there are always a few people who are different — but the vast (vast!) majority of businesses are run the way Mr. Schiff describes. This is the way the world works. It's human nature…human nature hasn't changed since the beginning of time, and it's not going to change now. You can scream, "Why can't we all be kinder, more compassionate people?" until you're blue in the face, but it's not going to make a difference. Until our politicians face the truth and start lawmaking with the real world in mind (rather than some utopian fantasyland), we are all screwed.

  19. Richard E. Lipinski | July 15, 2009

    Peter I am sure YOU can answer this question. Do people or companies that generate profits have to hurt other people by doing so?

  20. Shah | July 15, 2009

    How about ALL the politicians taking a pay cut along with these warped execs who think laying people off while handing themselves bonuses with no improvement in company productivity. The relevant compensation vs. productivity is so unbalanced it's no wonder that people can't make ends meet. I mean seriously, how many big wigs have given themselves bonuses at the expense of their employees? It's absolutely appalling!!! As a business owner, I expect to have to pay a fare wage for the work being performed.

    On a related note, I fully understand that many companies were overstaffed anyway and hopefully those who really made a difference were retained.

    Lastly, isn't it less expensive to have someone work OT than hiring another person? Do more with less, sure but make sure you are setting realistic goals!

  21. Gary Wardell | July 19, 2009

    Health care insurance not an increase in minimun wage.

    Why should taxpayers be subsidizing the cost of health care instead of the employer?

    Any job without health care insurance is not worth having is it?

  22. Lisa Bessen | July 20, 2009

    Does anyone remember reading "The Grapes of Wrath"? If there is no minimum wage, then there will always be another group of hungrier people who will do the job for less. Eventually, the people doing the job for almost nothing, can't buy enough food to live. Meanwhile, the richest get richer on the backs of the poor. Remember Ford paying his workers enough so that they could afford to buy a Ford car?

    I've volunteered at lots of homeless shelters. What amazes me is when I recognize the clerk who works full-time for minimum wage at the local store. In high rent areas, a person can't meet their own food and shelter needs by working full-time at minimum wage. Does that seem right?

    Peter Schiff then states that obviously people on minimum wage should not be having families until they are financially stable. (BTW, are you even pro-choice, Peter?) On minimum wage, if you can't pay for food and rent, can you afford condoms at 50 cents each? Can you afford a medical appointment for other birth control? No.

    For a first hand look at life on minimum wage, I recommend Barbara Ehrenreich's book "Nickled and Dimed: On (not) getting by in America". This highly qualified individual does under cover reporting and writes about her experiences living on minimum wage for a year.

    From personal experience, I worked harder at McDonalds's as a teenager where "if you have time to lean, you have time to clean" then I did designing software for Wall Street.

    Everyone deserves a living wage –at least $14/hour.

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