Power & Market

How Minimum Wage Laws Have Made the Job Search Worse for So Many

Generally I think people who advocate for minimum wage laws mean well but likely have a fundamental misunderstanding of the topic. Pleas for a living wage are not new by any means. Saint Thomas Aquinas believed that commodities (farm products) should demand a fair price and that workers should be paid a sufficient income to support themselves. In his time period, however, this was unachievable, as the majority of people lived very minimally and often survived on their own food production. The idea of a “just wage” or “living wage” really saw a resurgence of popularity during the Industrial Revolution. Social reformers of the time believed that it would be more beneficial for children to be in school, rather than working for low wages in dangerous conditions. This belief led to the creation of the first minimum wage laws in the country.

Minimum Wage Laws as a Limit on Total Labor

In 1912 Massachusetts passed the first minimum wage laws the US had ever seen, although it was only pertinent to women and children. The law was passed largely in response to a fear that unskilled workers who were paid low wages were taking the jobs of adult men. The idea behind the law was that by forcing employers to pay unskilled workers similar wages to skilled ones employers would opt for the latter, protecting the working man from competition. Many states followed Massachusetts’s example, but these laws were short lived as the United States Supreme Court ruled them unconstitutional for violating the principle of freedom of contract. The repeal of these laws was largely ignored as the country prospered in the 1920s. High demand for workers, coupled with tightened immigration restrictions, allowed for competition within the market to allow wages and working conditions to naturally improve with no coercion from outside forces.

In 1929 the unemployment rate in the US was roughly 3.14 percent compared to 24.75 percent in 1933. As wages across the nation began to decrease, the desire for a guaranteed minimum wage again resurged. Unfortunately, the underlying justification for the laws seemed to shift from getting children out of the workforce to instead guaranteeing a “living wage” to those who were employed. What is misunderstood about this situation is that even though many with jobs were making less, if wages had remained where they had been in the 1920s many more people would have been without a job. In 1933 the New Deal’s National Industrial Recovery Act (NIRA) promised a minimum wage. This was largely a failure, as it only increased the wages of unskilled workers, who already struggled to find gainful employment, not the wages of skilled workers, who already were paid above the minimum wage. Rather than stimulating recovery, it appears to have made it harder for unskilled laborers to find work. The NIRA lasted only two years before it was deemed unconstitutional as well, in 1935. It was replaced by the Fair Labor Standards Act in 1938. and since then the US has had a minimum wage.

The Fair Labor Standards Act did not immediately impact the labor market in a significant manner. Once the US began to militarize in the 1940s, the wartime economy increased wages far above the minimum. It remained this way until 1956, when Congress significantly increased the minimum wage and authorized the US Department of Labor to conduct surveys to increase employer compliance. Teenagers have always had a higher unemployment rate than adults, but after 1956 there was an incredible proliferation of teen unemployment, illustrated in the graph below.


Teenagers typically have the least marketable skills other than the unique value they possess as low-wage workers. Without this advantage, many lost their jobs to more skilled laborers in the short term and the long-term impact of automation is has started to be realized more and more.

Perhaps more alarming is the power that these minimum wage laws grant employers to discriminate in hiring. As wages increase and businesses reduce their workforces, this creates a surplus of individuals looking for employment. Economist Thomas Hall in Aftermath: The Unintended Consequences of Public Policies explains very clearly that discrimination is very difficult when the amount of applicants is similar to the amount of job vacancies in the market. As this surplus increases, it empowers employers to increasingly choose employees based on personal preferences, including race. Historically, black teens have had a higher unemployment than their white counterparts, but after the 1956 wage increases it became much worse. This can be seen in the following graph depicting the difference in unemployment rates among black and white teenagers before and after the 1956 wage increases.


It’s ironic that labor unions and politicians that call for higher minimum wage laws forget why they were enacted in the first place: to force unskilled laborers (largely children) out of the workplace. This has greatly impacted the most vulnerable groups of workers, namely teenagers, and steals valuable experience that they need to be successful in gaining future work. Although many people who support these laws have good motives, the road to hell is surely paved with good intentions. Supporting these laws seems good in theory; in practice they not only promote a slew of dangerous outcomes, but can explicitly allow racist hiring behavior.

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