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  • Jul 31, 2014
  • Updated: 7:39am
BusinessEconomy
Unemployment

High minimum wage kills jobs and makes poor worse off

If the EU experience is anything to go by, a high minimum wage pushes more people into unemployment and makes the poor even worse-off

PUBLISHED : Monday, 31 March, 2014, 11:31am
UPDATED : Tuesday, 01 April, 2014, 3:21am

US President Barack Obama set the chattering classes abuzz after his unilateral decision to raise the minimum wage for newly hired federal contract workers.

"It's good for the economy, it's good for America," he said in his recent State of the Union address.

As the worldwide economic slump drags on, the political drumbeat to either introduce minimum wage laws (read Germany) or increase the minimum in countries where these laws already exist, such as Indonesia, is becoming deafening.

Yet the glowing claims about minimum wage laws do not pass the most basic economic tests. Just look at the data from Europe.

There are seven European Union countries in which no minimum wage is mandated - Austria, Cyprus, Denmark, Finland, Germany, Italy and Sweden. Compare the levels of unemployment in those countries with EU nations that impose a minimum wage and the results are clear - a minimum wage leads to higher levels of unemployment.

In the 21 countries with a minimum wage, the unemployment rate averages at 11.8 per cent. The average unemployment rate in the seven countries without mandated minimum wages is about one-third lower - 7.9 per cent.

The glowing claims about minimum wage laws do not pass the most basic economic tests

This point is even more pronounced when looking at rates of unemployment among the EU's youth - defined as those younger than 25 years of age.

In the countries with minimum wage laws, 27.7 per cent of the youth demographic - more than one in four young adults - was unemployed in 2012.

This is considerably higher than the youth unemployment rate in the seven countries without minimum wages - 19.5 per cent in 2012 - a gap that has only widened since the Lehman Brothers collapse in 2008.

So, minimum wage laws, while advertised under the banner of social justice, do not live up to the claims made by those who tout them.

They do not lift low-wage earners to a so-called "social minimum". Indeed, minimum wage laws - imposed at the levels employed in Europe - push a considerable number of people into unemployment.

And, unless those newly unemployed qualify for government assistance (read welfare), they will sink below, or further below, the social minimum.

As Nobel Prize winner Milton Friedman correctly quipped: "A minimum wage law is, in reality, a law that makes it illegal for an employer to hire a person with limited skills."

Jens Weidmann, president of Germany's Bundesbank, must have heard Friedman and looked at these European data before he took on Chancellor Dr Angela Merkel for proposing the introduction of a minimum wage law in Germany.

In short, Weidmann said this would damage Germany's labour market and be a job killer.

He is right.

Executives surveyed in the recently released Duke University/ CFO Magazine global business outlook survey agree. Chief financial officers from around the world were interviewed, and a significant number of them concurred: a minimum wage increase in the United States - from US$7.25 per hour to Obama's US$10.10 per hour - would kill jobs in the country.

"The real tragedy of minimum wage laws is that they are supported by well-meaning groups who want to reduce poverty. But the people who are hurt most by high minimums are the most poverty-stricken," Friedman concluded.

High mandated minimum wages will throw people out of work and on to the welfare rolls, in cases where unemployment benefits exist.

When it comes to welfare payments, they obey the laws of economics, too. Indeed, if something - like unemployment - is subsidised, more of it will be produced.

When the data on unemployment benefits speaks, it tells us that if the unemployed receive unemployment benefits, the chances that they will become employed are reduced.

That data also shows that the probability of an unemployed worker finding employment increases dramatically the closer the unemployed worker comes to the termination date for receipt of unemployment benefits.

In short, when the prospect of losing welfare benefits raises its head, unemployed workers magically tend to find work.

The most important lesson to take away from allowing the minimum wage and unemployment benefit data to talk is that abstract notions of what is right, good and just should be examined from a concrete, operational point of view. A dose of reality is most edifying.

Steve Hanke is professor of applied economics at Johns Hopkins University. He is also a senior fellow and director of the Troubled Currencies Project at the Cato Institute in Washington

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timliu01@hotmail.com
The comparison is not exactly fair. Germany do not have a single minimum wage but have minimum wages depending sectors with a lowest of about 7Euro (HK$75). IT has an unemployment rate of 6.8% in 2010 (most difficult time in the recession) and is falling to 5.5% in 2013/14. UK has a single minimum wage (~£6.00, HK$75) across the whole country. Its unemployment rate remains below 8% throughout the most difficult time in the recession and is now falling to 7.2%
Italy has no minimum wage. Yet the unemployment rate is rising from 8.3% in 2010 to 12.5% recently.
There is no straightforward relationship between unemployment rate and minimum wage. It is more likely related to the state of economy and the flexibility of the job market.
yeifeiyu2
Can't agree more, simply by comparing unemployment rate and minimum wage is not sufficient to build up the argument. Unemployment rate could be the result of a pool of factors and minimum wage is just one of them. One could argue a lift of minimum wage would spur the economy by increase consumerism, in other words, "the more people you hire the more qualified consumer of your product you'll get", however it's a cost-effective calculation job for the business to do
virokick
Paul Krugman and Joseph Stiglitz both also Nobel Price winners -support Minimum wage. We in HK embrace Friedman's free market principles and this has produced a few rich tycoons but a whole nation of low wage earners. In HK bosses work employees to death and pay them peanuts.
daily
As usual, Obama has nothing good to contribute to the United States or the rest of the world............his ideals and way of thinking only "sounds good" but has no practicality in the real world.............This guy purely has no substance and is simply all talk.
raglan
We all knew from the start that min wage is a political decision not an economic one.
hmleung600
What politicians such as Lee Cheuk-yan would say to Steve Hanke or Milton Friedman?
kctony
Don't take research results by Western academics (Nobel or not) for granted. The #1 enemy of doing business in America and Europe is wage cost. In HK it is rent.
The minimum wage effect is vastly different too. In HK I doubt if you can find an office staff earning minimum wage. In Canada & US there are many. So the minimum wage legislation in HK has helped only those low-paid jobs e.g. restaurant waiting. And you think those "Cha ChanTan" closed because of wage? The minimum wage helped the waiters earn $1000 more per month, a substantial amount to improve their livelihood. The added cost to the owners is perhaps $10,000 more, probably a day's racing bet. But when the landlord comes calling for a new lease, they have to discontinue business.
I don't think Freidman has researched in HK. It's a pity that his theories were referred repeatedly by HK pro-business legislators. Many legislators keep warning high wage cost will kill the HK economy. I don't think any one of the factory workers in their family business is earning below minimum wage anyway.
In America if a couple earns minimum wage, they can afford to rent a decent apartment and own a second hand car. In HK a couple working 2 jobs each at minimum wage won't even get close to the living standard of their counterparts in America.
Lee Cheuk-yan won't have much to say to Hanke & Friedman. Just something like, "Come and do a research in HK and see it for yourself."
 
 
 
 
 

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