Thursday, January 22, 2015

Why the minimum wage promotes discrimination

Despite lofty rhetoric to the contrary, minimum wage laws increase the likelihood of racial discrimination.

According to black economist Walter Williams, it is “for a number of socioeconomic reasons that white youths, more often than their black counterparts, have higher levels of educational attainment and training,” and thus tend to be higher-skilled. While reasons for this are beyond the purview of this article, interested observers can read Williams’ Race and Economics.

People with varying skill levels may prefer to sell their labor for different wage rates. For instance, if Bill’s skill level is lower than Sally’s, Bill may be willing to accept a lower wage than Sally for the same job, as he prefers employment to unemployment. Yet minimum wage laws disallow such variance. One consequence may be cost-free racial prejudice.

Suppose an employer has a preference for white employees. Imagine two candidates of equal productivity—one white and one black—apply for the same minimum wage job. In this case, the cost of hiring either candidate is $7.25. Discrimination carries zero cost.

But now assume there were no minimum wage, and that the black candidate would like to drop his charge to $5.00. In this scenario, if the employer indulges his racist preferences, he faces the cost of the difference between the two candidates ($7.25-$5.00), or $2.25. In a word, the market penalizes discrimination.

But the market does further justice. As Williams argues, an employer who discriminates in a free market will likely go out of business.  The firm that maintains its racist preferences hires the more expensive labor. The non-discriminating firm hires the cheaper labor, saving on production costs and generating higher profits. In turn this firm undercuts its competition by slashing prices, thereby pushing the racist firm out of the market. Attracted by higher profits, additional firms enter the field.  The competition to attract cheap black labor puts upward pressure on wage-rates, organically raising them toward wage equality.

Before widespread minimum wage laws, black youth unemployment was often equal to or lower than their white counterparts. Unfortunately, plagued by a morass of federal and state minimum wage laws, these market mechanisms have been rendered impotent, and scores of young, unemployed blacks suffer the consequence.

Cross-posted at Liberty Unyielding.

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