Minimum wages cause unemployment

May 21, 2003

Free Market Foundation

The unemployment rate in America recently inched up to 6 percent, fuelling calls for the US Congress to “do something” other than cutting taxes and government spending to encourage job-creating economic growth. Some actions the US Congress might take could even increase unemployment, NCPA Senior Fellow Morgan O. Reynolds points out.

Reynolds, recently chief economist for the U.S. Department of Labour, says that extending unemployment benefits helped raise unemployment from its boom-time low of 3.9 percent:

Extending unemployment benefits which has been done twice so far increased the unemployment rate by 0.2 percentage points by discouraging wage moderation so that people could price themselves back into employment.

But U.S. benefits are not so generous as in the European Union, where long-term unemployment is intractable and Germany is debating cutting unemployment benefits to one year, while benefits in other EU countries can be extended to five years.

A 6 percent unemployment rate is about the post-war average, but may rise higher, says Reynolds even more so if the US Congress raises the federal minimum wage:

Manufacturing wages have risen to the point that the federal minimum wage is about 35 percent of the average but if the US Congress increased the minimum to half the manufacturing wage, employment opportunities would be destroyed.

At its current level, the minimum wage destroys employment opportunities for prison inmates, for example; as a result, only about 4,000 of 1.3 million inmates are employed in prison industries.

Barring efforts to sustain unions by increasing coercive measures including minimum wages and collective bargaining union membership erodes in the marketplace, says Reynolds. Workers are gravitating toward non-union firms because they have the jobs. Meanwhile, union membership has fallen from 35 percent in the early 1950s to 8.5 percent in 2001. However, it is 37.5 percent in the public sector.

Source: Labor and the Austrian School, an interview with Morgan O. Reynolds, Austrian Economics Newsletter, Summer 2003, Mises Institute.

For text http://www.mises.org/fullstory.asp?control=1216

For more on Unemployment http://www.ncpa.org/iss/eco/

FMF Policy Bulletin\13 May 2003