Minimum Wage Laws | Basic Economics by Thomas Sowell | Ch. 11

In previous chapters, we looked at the macro-environment of when prices weren't allowed to freely rise and fall according to the market's demands. In this chapter, we'll be taking a look at the effects of such laws (i.e. minimum wage) on the workers.

If you want to read about my summaries and thoughts about previous chapters, please click here. Otherwise, here's the summary and thoughts for chapter 11!

Chapter Summary

As a review, it's important to remember that, when prices (or wages, in this case) are not allowed to go lower as the market demands, it typically creates a surplus of that product or service — which means those things typically goes to waste. In the case of workers, since not every employer (especially of small businesses) can pay that much to their workers, it means that a lot of people would be unemployed. Let's take a look at this important phenomenon.


When we talk about unemployment, or people who are unemployed, we aren't saying that these people are useless or that there is no work for them to do. People are unemployed for various reasons, and many who are can actually do many typical jobs, though perhaps of lesser quality than hired ones. Remember from the previous chapter that those who are younger are often less experienced. When these younger people are delayed from being in the workforce, this lack of experience still follows them as they get older, giving them an ever increasing disadvantage to others who have been employed longer.

Minimum wage laws are not universal in the modern world. Nations like Switzerland and Singapore have no minimum wage laws, and have very low unemployment rates. Even the United States, before the Hoover administration, had no minimum wage law, and its annual unemployment rate was as low as 1.8%. When industrialized countries begin to add these kinds of laws in, however, it's almost inevitable that the unemployment rate begins to increase. This is an almost universally recognized principle for economists.

So why do such laws exist?

Well, some government authorities are beginning to recognize this as well. But such politicians don't really attempt to repeal these laws (which would be unpopular). Instead, they sometimes allow them to continue, and try to just wait for inflation to overtake the minimum wage.

Other organizations like labor unions lobby for and keep minimum wage laws because it's in their union members' own interests. This is because a large majority of union members actually earn higher than the minimum wage. By enacting minimum wage laws, they actually displace those who would have earned lower than the minimum wage (since employers can no longer keep those kinds of workers), and thus create an artificial demand for their members. In this way, labor unions 'tariff' the price of non-union labor that competes for union members' jobs.

A popular way minimum wage is being sold to Americans nowadays is the idea of a “living wage”. This is idea that each city has a different living standards than others, and as such, a minimum wage wouldn't be enough for those living in these cities. Of course, when we understand that artificially increasing prices always leads to surplus, no matter if it's called “minimum wage” or “living wage”, it's easy to predict what happens next: that the poorest people in these cities are the ones who have most often lost their jobs. As Sowell says:

Dozens of studies of the effects of minimum wages in the United States...Europe, Latin America, the Caribbean, Indonesia, Canada, Australia, and New Zealand...concluded that, despite the various approaches and methods used in these studies, this literature as a whole was one “largely solidifying the conventional view that minimum wages reduce employment among low-skilled workers.”

Despite this, many organizations or governmental commissions attempt to debunk this fact. A problem with most of these studies is that they often can only measure the employment of businesses that have survived the minimum wage laws. They don't account for the number of businesses that failed, which is precisely what happens when a city's unemployment increases.

No matter how one feels about whether there should be a floor for wages, the reality is that instituting these kinds of laws will always have negative consequences on the very people the laws were supposed to help.

Sowell importantly notes, “In a free market, low-productivity workers are just as employable at a low wage rate as high-productivity workers are at a high wage rate.” In other words, it doesn't matter in a free market whether someone is highly skilled, highly intelligent, or lowly skilled and less knowledgeable. They are all employable, and can all earn a living. But when minimum wage laws are introduced, only the higher productivity people can be employed, as lower skilled people have their options taken away, and are priced out of work.

Differential Impact

In the last section of this chapter, Sowell looks at the impacts of minimum wage across different countries and people around the world.

In Australia, where the minimum wage is almost 60% of the nation's median wage the lowest unemployment rate generally never reached as low as 10% from 1978 to 2002.

In France, at the turn of the millennium, national unemployment had gone up to 10%, but for those under the age of 25, the unemployment rate was higher than 20%. Across the European Union, during the 2009 global recession, the unemployment was 21% for the same age range, and in some places (like Spain) hd reached as high as 40%.

Similarly, in the United States, in imitating European nations' minimum wage laws, it went from having lower unemployment rates than Canada, Britain, Germany, France, and Japan in the early 2000's to being higher than them by the time 2011 rolled around.

What about racial minority groups? After all, minimum wage laws are often touted to help these less-advantaged groups in industrial societies. An interesting fact Sowell points out is that, in the 1920's, minimum wage laws were actually introduced in order to eliminate competition from minorities, including Japanese in Canada or blacks in the United States or South Africa. With this in mind, let's look at the actual history.

In the United States, before federal minimum wage laws became a thing in the 1930's, black unemployment rate was actually lower than white unemployment. In the 1930's several laws were enacted, including the Davis Bacon Act of 1931, the National Industrial Recovery Act of 1933, and the Fair Labor Standards Act of 1938, which all set or raised minimum wage laws at a federal level. Furthermore, the National Labor Relations Act of 1935 promoted unionization. While the National Industrial Recovery Act was eventually knocked down for being unconstitutional, the Fair Labor Standards Act of 1938 which came later was upheld.

What was the effect of these laws? Black unemployment surpassed that of whites in 1948. By the time 1949 came around, teenage black unemployment rate went to almost 16%, and by the time we get to 1971, it was two times that, and stayed that way that until 1997. In 2009, it was more than three times that, which means it was almost 50%.

We can't blame these things on lack of education, skills, and racism. After all, it was far worse in the early and mid twentieth century for black Americans. The truth is that it can only be associated with one thing—the minimum wage laws that were instituted and continued since then.

My Thoughts

As I read through this chapter, I realized that Sowell (whether directly or indirectly) was arguing for a fascinating reversal in societal expectations.

Here's the jimmy: In school, I was often taught that the best way to earn a living was to get the best education I could, so that I could then jumpstart my work life and get ahead, earning more due to my bachelor's, master's, or graduate degree. In fact, one of the mantras taught to me in high school was that, by going to university to get my undergraduate degree, I would come out automatically earning more than with a high school degree.

There are several problems with this.

First of all, most of the statistics I was shown was comparing the salary of a kid straight out of high school to someone that just graduated university. But the college graduate was, on average, four years older already. So it would be more appropriate to compare the two in the same age, with the bachelor's degree graduate vs a high schooler with at least four years of experience.

Second, the university graduate comes out with a ton of student loan debt. And so all salaries would need to be balanced against the fact that the graduate would be owing money for several years after the fact.

Third, a university undergrad is not often trained for special or specific work. Instead, undergrad degrees are often extremely general, and it's really only when you get a graduate degree that specialization begins in any field. In fact, undergrads are so unspecialized, that 43% of them are underemployed in the first year of work! This varies, of course, but the fact that 43% is an average is extraordinarily disturbing.

It means that, for any average college grad, you are likely to graduate and work for less than what your degree demands, and additionally have to pay massive tuition loans on top of that. All the while not having any real world work experience.

We often hear today (at least we do in the United States) about the failure of education systems. But often the conversation is concentrated on improving testing standards, or changing the way school curriculum is structured, or reforming the way teachers are educated and supported.

But the simple truth is this: because most schools are a structured system that adhere to a singular process, they can NEVER guarantee someone will learn what they as an unique individual needs to learn in order to earn a living. They only rely on a formulaic process to churn out the same types of people over and over.

But schools cannot replace real work experience, no matter how well-taught students are. Experience begets experience. In fact, the most effective schools often include on-job training programs, but that can only go so far, since students in the school system are not often taught failure and working through failure in the process.

What would be implied from what Sowell has written so far is advocacy for teenagers to begin working again, rather than hamstringing them by attempting to force higher learning or education on them. When people are exposed to competition, and learn to do the best they can in that environment, they are made stronger and better for it, by experience. Here, I'm reminded of a quote from Christopher Nolan's film, Batman Begins:

Why do we fall? So we can learn to pick ourselves up.