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The Minimum Wage, Discrimination, and Inequality

January 19, 2009

Tags Free MarketsLegal SystemPhilosophy and MethodologyProduction Theory

Racial Discrimination Dolls

One of the things that first attracted me to economics is that its logic leads us sometimes to counterintuitive conclusions. A perfect example of this is the regulated workplace. The minimum wage raises incomes for some workers and lowers incomes for others. Workplace safety regulations advantage those who are very risk averse at the expense of those who are willing to accept higher risks in exchange for higher incomes. Laws against "child labor" benefit the relatively well off at the expense of the needy.

The tragic irony of the regulated workplace is that it most adversely affects those on the margins of society. Beyond their disemployment effects on those whose labor is rendered submarginal by regulations on wages and working conditions, regulations in the workplace also exacerbate and perpetuate inequities that would otherwise be mitigated by the market process.

Racism and sexism have been ugly facts about the human social environment since time immemorial. Commentators and critics hypothesize that members of the dominant cultural and ethnic group have advantages stemming from their membership in the dominant ethnic group or socioeconomic class.

I'll use myself as an example. As much as I would like to pride myself on having worked hard to get where I am, my skin color, cultural/religious background, and relatively stable upbringing made for a much less bumpy road to travel than that traveled by those who are less fortunate than I.

It does not follow from this that well-intentioned government intervention that aims to raise wages by legislative fiat is an appropriate corrective. Tragically, a higher minimum wage and workplace-safety regulations are likely to exacerbate rather than mitigate social inequalities by removing the penalties that discriminatory employers would have to pay in a competitive market and by eliminating an important margin on which disadvantaged groups could compete.

When people aren't allowed to compete on the basis of price, quantity, and quality, firms can discriminate on the basis of something other than productivity.

A racist employer would suffer a penalty (lower profits than his competitors) if he insisted on indulging a "taste for discrimination" in a competitive market. When prices are fixed, and labor conditions are set by law, that same employer can indulge his racist preferences without receiving his capitalist comeuppance.

Further, the higher minimum wage takes away a possible advantage for historically disadvantaged groups, and we can illustrate this with a thought experiment that I use in economics 101. Imagine that two people apply for a job at a fast-food restaurant. The first is Crackhead Carl, a middle-aged African-American male who was just released from jail, where he had spent the last few years after stealing from a former employer. Carl has seen the light, or so he claims. He has gotten off the drugs, has seen the error of his ways, and sincerely wishes to better his position in spite of having made a gigantic mess of things.

"Many valuable skills that are learned in the workplace cannot be learned in a classroom."

The second applicant is Tad Vanderbilt Rockefeller, a flaxen-haired white teenager from an affluent suburb who parks his BMW, breezes through the door in an Armani suit, and flashes a perfect smile as he fills out a job application with his monogrammed fountain pen. His references are impeccable. So who gets the job?

The answer is, "it depends."

Carl knows that he needs some way to convey his sincerity and fidelity to a prospective employer, and having shredded his credibility through a life of riotous living, people who want to give him the benefit of the doubt nonetheless remain skeptical even though he promises that this time, things will be different. In an unregulated market, Carl could accept lower wages or relatively riskier working conditions in order to compete with Tad.

When wages and working conditions are heavily regulated, however, the law cuts off Carl's ability to compete. In all likelihood, Tad would get the job and Carl would again be shoved out onto society's fringes. One of the unintended consequences of the minimum wage and workplace regulations is that they perpetuate inequality.

One might respond that what Carl needs is education, not a dead-end job mopping floors at McDonald's. This may be true, but many valuable skills that are learned in the workplace cannot be learned in a classroom. It is the development of this tacit knowledge and these valuable skills that Carl misses out on by being regulated out of the workplace.

In this case, the choice was pretty clear. Tad appears to have been a less risky choice than Carl whether the employer is a racist or not. But racism is an entrepreneurial error, and one that should be quickly punished in the marketplace. With restrictions on the way the labor market functions, the entrepreneurial error (and moral abomination) that is racism can go uncorrected.

$58 $39

When prices are fixed, and labor conditions are set by law, an employer can indulge his racist preferences without receiving his capitalist comeuppance.

Milton Friedman openly argued that minimum-wage laws are racist in effect if not intent; in the early 1960s, he pointed out that, as a result of higher minimum wages, black teenage unemployment was much higher than it would otherwise be. Denied the opportunity to earn incomes and to acquire valuable skills, those adversely affected by the minimum wage were not allowed to share in the general prosperity that a market economy produces. Empirical evidence reported by economists David Neumark and William Wascher suggests that among the long-run effects of minimum wages are lower degrees of educational attainment, less on-the-job training, and lower lifetime earnings.

In The Fatal Conceit, F.A. Hayek said that "[t]he curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

In an imperfect world, we suffer from a "fatal conceit" when we imagine that we can make justice roll down like waters and make righteousness like an ever-flowing stream just by passing laws that say "make it so." Indeed, laws like this will more often than not make justice and righteousness roll more slowly by perpetuating the inequalities that have historically worked against disadvantaged groups.

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