Minimum Wage Meets Reality

Great little article by a man who understands and teaches economics. Comments, anyone?


"Something for nothing: Part III

Mar 2, 2006
by Thomas Sowell

The Economist magazine reports that the official unemployment rate in South Africa is 26 percent but that the real unemployment rate there may be even higher. The South African economy is growing. Why then this extremely high unemployment rate? What is going on?

What is going on in South Africa is what has been going on in other economies with huge problems. Somebody could not resist the lure of something for nothing.

Minimum wages in South Africa have been set higher than the productivity of many workers, so employers have no incentive to hire those workers, even though such workers are perfectly capable of producing much-needed goods and services.

South African labor unions say that they are not going to let their workers become "the West's sweatshop." But the irony is that a South African firm which has been manufacturing aluminum wheels solely in South Africa for two decades has begun expanding its output by outsourcing the additional jobs to Poland.

Does that mean that Poland is becoming South Africa's sweatshop? Or does it mean that there are economic consequences to setting wage levels in disregard of productivity levels?

The South African government refuses to admit that an unrealistically high minimum wage rate has anything to do with the high unemployment rate. In other words, they think that they can pass a law to give workers something for nothing.

That idea is not peculiar to South Africa. In many cities and towns across America, local politicians, activists, and even religious groups have been pushing for laws mandating "a living wage" higher than the federal minimum wage.

They too apparently think that there will be no dangers to the jobs of workers whose output is not worth what third parties choose to call a "living wage" -- in other words, that the workers can get something for nothing.

South Africa's problem is compounded by the fact that, in addition to minimum wages set above the level of many workers' productivity, the government has passed laws making it very difficult to fire an employee.

That should reduce unemployment, right? Wrong. Countries like Germany with strong job protection laws have chronically much higher unemployment rates than countries like the United States, where the government does not impose such laws on private businesses.

Making it harder to fire workers makes it more risky to hire workers in the first place. It is easier to substitute capital for labor. South African companies "rely more on capital" than labor, according to The Economist magazine.

Even when times are booming and there is a demand for more output, employers may work their existing employees longer hours rather than hire new workers whom they will have a hard time letting go after the boom passes.

Nothing is easier for politicians than to think up benefits that they can confer on workers by imposing the costs on somebody else. It's something-for-nothing time, and it pays off for politicians at election time.

Meanwhile, businesses can't just pick up and leave the city or the state, much less the country, overnight. But, like the South African company that expanded its output and employment in Poland, businesses can do their expansion where costs imposed on them by politicians are not so high.

Some businesses are not expanding but are just trying to survive. Costs blithely loaded onto them by politicians can prevent some of these kinds of businesses from surviving -- and their employees lose their jobs.

Over time, businesses can shift more and more of their operations out of places where extra costs are imposed politically and some just move their whole business elsewhere. That means taking their jobs, and the taxes they pay, elsewhere.

For politicians, however, killing the goose that lays the golden eggs is a viable strategy, provided that the goose doesn't die before the next election. Provided also that people have short memories, don't connect the dots, and don't keep in mind that there is no such thing as something for nothing."

http://www.townhall.com/opinion/colu...02/188387.html

[Howard Beale]

Nice article. I always enjoy reading him.

This post is also timely. I was considering posting about the situation in France, with it's current labor law fiasco. I don't know much about it and wanted to know: Is it really that tough to fire someone once they are hired? What does an employer do if the worker doesn't work to their satisfaction?

[morphball]

I agree w/ everything the article has to say. But in the USA, are workers producing more than $5.15/hr? I would say that most produce more.

[benfranklin]

[ QUOTE ]
I was considering posting about the situation in France, with it's current labor law fiasco. I don't know much about it and wanted to know: Is it really that tough to fire someone once they are hired? What does an employer do if the worker doesn't work to their satisfaction?

[/ QUOTE ]

The minimun wage in France, last time I looked it up, was something like 7.19 euros per hour, which is about $8.50. New employees can be fired without cause within a probation period, which appears to be 1-3 months. After that, there are a lot of hoops to jump through, including notice procedures, appeals, and mandatory termination pay.

Unemployment for young workers (under 25) is officially around 25%, and probably higher, especially among the poor. No one on either side of the debate over there denies that French employers are very reluctant to hire new workers, especially young ones, because of the labor laws. France also is outsourcing more and more work to middle European countries.

[Brainwalter]

[ QUOTE ]
I agree w/ everything the article has to say. But in the USA, are workers producing more than $5.15/hr? I would say that most produce more.

[/ QUOTE ]

And most are paid more too.

[hmkpoker]

Wait I don't understand, he's saying that government restrictions on businesses are bad for the economy? [img]/images/graemlins/confused.gif[/img]

[FlFishOn]

In one column Thomas Sowell packs in more common sense than Maureen Dowd has published in her life. Ah, but if the measure were vitriol and sarsacm...

[Nielsio]

http://ca.geocities.com/s.molyneux@r..._causality.htm

[Borodog]

Where is moorobot to explain how legislating something for nothing generates economic prosperity?

[TomCollins]

[ QUOTE ]
Where is moorobot to explain how legislating something for nothing generates economic prosperity?

[/ QUOTE ]

Clearly every business leader is too stupid to run their own business. That's basically his argument. That, and hatred for anyone successful.