Who makes minimum wage, and what we should do about it

Thanks to the Political Calculations blog (The Economic Detective: Prime Suspect Revealed), we can see who is actually earning those minimum wage salaries.Percentage of Individuals Earning Federal Minimum Wage (or Less) by Age Group in 2007 (pie chart)
Look closely and you’ll see that just under half of all minimum wage workers are under 25 years old. In other words, many people who earn minimum wage are working part-time (students) and people with little or no work experience.
It’s not uncommon to hear people complaining that minimum wage is too low. According to many of those complainers, minimum wage is not a living wage – that is, as per Wikipedia, “the minimum hourly wage necessary for a person to achieve some specific standard of living.” Often this is extended to the complaint that “you can’t raise a family on minimum wage.”
I always felt there should be a minimum wage. The minimum wage for any worker in any sector should be $0. It should be illegal to pay anyone less than zero for their services. Above that, the market (that is, employers and workers) should decide, based on what’s appropriate based on their respective wants and needs.
How can I say that? What about the living wage, and people trying to support families on minimum wage?

“[T]he company couldn’t increase the price of the bows to offset the higher labor costs without losing sales, so the company was forced to move production to Mexico, and now more than 200 Missouri jobs have evaporated – largely thanks to the minimum wage.”
CARPE DIEM: How Minimum Wage Caused 200 Jobs to Evaporate

First, the aforementioned graph already illustrates that a substantial majority of people making minimum wage are younger than 25. The U.S. Census reports that the average age of women giving birth for the first time (in 2004) is 25.2. If you’re 25 years old, you have a 13.5% (or less) chance to be making minimum wage.
Second, according to a 1994 study by the Employment Policies Institute, as reported by the U.S. House of Representatives, “only 1 percent [of minimum wage earners] are heads of households.” In other words, the minimum wage does little to directly impact 99% of the heads of household.
Third, we must remember that a government-imposed minimum wage is an artificial benchmark of the cost of labor. By setting a minimum wage, government draws a line in the sand that companies can use to determine what they should pay low-skill workers. If the minimum wage is too high, companies will be less compelled to hire more workers or to pay them more than the minimum. If the minimum wage is too low (or nonexistent), companies will offer a salary based on what workers demand in order to take the job. In a market-based wage system, employers and employees are empowered to negotiate and compete for each other’s services. As a result, even without a minimum wage, a “minimum” will exist – the minimum being the amount of money someone is willing to take to provide a service.
Fourth, we mustn’t forget our obligations as an individuals, citizens, and parents. If you can’t provide for children, don’t have them – or put in the effort to increase your standard of living so you can provide for them. In America, there are so many opportunities that can be met if you take the initiative to reach for them.
Fifth, any government-imposed minimum wage can reduce the employment opportunities for low-skill and entry-level workers. Fortunately, we have recent history to show some correlations between minimum wage increases and higher unemployment for entry-level workers. Political Calculations gives us the following graph from their article, The Third Leg of the Recession?.
What makes the graph interesting is the dramatic increase in unemployment for entry-level workers (those between 16 and 19 years old). Yes, some of these losses can be attributed to the economic downturn. However, the graph exposes a dark reality about minimum wage laws, exemplified by the following story.

Tom, Dick, and Harry work at the local grocery store, each working 20 hours a week and earning $5.50 an hour – 35 cents more than the government-mandated minimum wage.
When the minimum wage is increased to s5.85 an hour, each worker enjoys a 35-cent per hour raise, but also finds their hours are reduced to 19 hours a week.
When the minimum wage is increased to $6.55 an hour, Tom and Dick enjoy the additional 70-cent per hour raise, and they both see their hours increase to 25 per week. Harry, unfortunately, loses his job.

If you artificially raise the wage for one worker, there is the potential for other workers to suffer. A smartly-run business will allocate time and money to get the work needed as efficiently as possible, within a fixed budget. Increasing an artificial minimum wage does not generate new sources of money for the business; instead, it simply reallocates money less efficiently than the market will do on its own.
Maybe government shouldn’t allow workers to be laid off, or hours cut, due to minimum wage hikes? Let’s consider the same Tom, Dick, and Harry if the grocery store owner was not permitted (by law) to fire or cut the hours of workers.

Tom, Dick, and Harry work at the local grocery store, each working 20 hours a week and earning $5.50 an hour – 35 cents more than the government-mandated minimum wage.
When the minimum wage is increased to s5.85 an hour, each worker enjoys a 35-cent per hour raise. The business owner’s labor costs have increased over 6% .
When the minimum wage is increased to $6.55 an hour, the three men enjoy an additional 70-cent per hour raise. The business owner’s labor costs have now increased nearly 20%.
When the minimum wage is increased to $7.25 an hour, the three men have obtained a 31% salary increase. Before the changes, the business owner paid $330 in labor costs ($110 per person); now he pays $435.
Prior to the minimum wage hike, the business owner planned to hire a fourth worker to work with Tom, Dick, and Harry. With the hikes, he no longer can do this; the money allocated to the fourth worker has already been spent on the existing three.

That’s right: A mandated minimum wage can increase salaries for those at the lower income levels who don’t lose their jobs, and block potential employment for others. Tom, Dick, and Harry enjoy an economic windfall; the guy whose job disappears as a result enjoys an economic depression.
In conclusion…
There will always be people who fall through the cracks, and always be exceptions to the rule. This is where friends, family, and communities come in. When someone you know helps you, you’re compelled to appreciate the help you’re given and not take advantage of it. When government helps you, you’re compelled to game the system for your own personal benefit.
Less government + More personal responsibility and empowerment = long-term positive results for everyone.

BP Oil Spill – Property Rights, Moral Hazard, and the Constitution

By now, nearly everyone is aware of the disastrous BP oil spill in the Gulf of Mexico.  An oil rig exploded, causing the death of 11 workers, and resulting in a leak of about 5,000 barrels of oil a day. In time, it is likely that this will become the worst oil disaster in history, trumping the Exxon Valdez spill of 1989. It is also being reported that the economic damages to coastal Gulf states, such as Louisiana, will be unprecedented.Oil Spill - Reuters
There is bad news for anyone who has been and will be affected by the BP spill.  It turns out the federal government passed a law about 20 years ago that essentially limited the liability for damages resultant an oil spill to $75 million. Analysts are reporting damages will likely total in the billions. Although BP has said they will “pay all legitimate claims”, they simply may not be obligated to pay any more than $75 million unless they explicitly agree to it. No one can say what they will do until this is all resolved.
As if they should have a choice!  Our government was founded on the defense of property rights. Sadly, we have received a steady dose of environmental disasters, with no end in sight, and there seems to be a correlation with the decline of property rights.
How is Congress able to get away with this time and again, while they walk the same halls that Adams and Jefferson once did? There is an absolutely common sense property rights argument that should be applied to the whole matter – You can’t dump garbage on your neighbors lawn. Likewise, you can’t dump oil all over the ocean and coast and not expect to pay to clean it up and pay full damages.
This is another case of the Federal Government using powers it does not have under the constitution to violate property rights, instead of upholding them. There will undoubtedly be calls for more regulation, and there already are. We’ve heard this before! More regulations are useless and serve to distort the market which grows our economy.  Regulations are ways for politicians to pick winners and losers in the marketplace, and often reward failure while stifling innovators.
There is a deeper problem with these so called, “government solutions”.  How can you put a limit on what an oil company will owe as the result of a spill, and still expect them to maintain the highest possible standards for safety?  Obviously, nobody at BP wanted an oil spill to occur.  But if the government has the power to shield a company, no matter what industry or circumstance, from risk, they will still never act as cautiously as they would if they were 100% exposed to risk.
It’s almost like saying here, put a whole year’s salary on one hand of blackjack, but if you lose you’ll only have to pay 40%. Some might take that bet, because the odds are in their favor for a big gain, and a much less substantial loss.  If they stood to lose it all, there is little chance the average person would act that foolishly.
Moral hazard occurs when governments shield businesses from risk, and it causes them to behave differently than they would have otherwise, if they were fully exposed to risk. Simply put, if the government didn’t have their back, BP (and other oil companies) would have a lot more incentive to make sure something like this could never happen.  The potential for financial ruin would be too great to ignore.  The most stringent standards for safety and quality would be met and exceeded, and no expense would be spared, because who could stand to pay the full damages of a major oil disaster?
Right now we have a situation where BP can refuse to pay any more than $75 million dollars beyond the cost of the cleanup itself.  It seems all of those fisherman who will now be unable to make a living in formerly clean seas are out of luck, because of an unconstitutional law passed by the government 20 years ago.  Now some in the government want to pass an ex post facto law, again explicitly unconstitutional, to force BP to pay up to $10 Billion. Where do they get these numbers?  That’s what I want to know.
Losers in all of this are not only BP and the people directly effected by this disaster, but the constitution and the people as well.  Instead of admitting that the framers of the constitution were correct in not delegating powers to impose such pandering special-interest measures, the establishment in Washington is attempting an even greater level of disrespect for the constitution by proposing a raise of the debt liability to $10 Billion, after the fact.  The people are forced to suffer these distortions of the constitution, and it does serve to diminish our Republic.  These types of things weaken our constitution and can render it useless over time.  Sadly, we’re at a point where it seems most of the things that government is doing are unconstitutional.
I think a better question would be, why don’t we send this law to the supreme court and see if it’s unconstitutional in the first place?  At the very least, government should stop abusing their powers and inventing new ones to cater to favored constituencies, and start exercising their duty to enforce contracts and property rights. Perhaps the newly re-discovered defense of property rights would pervade other areas of our society, and we would all be a lot better off.

U.S. Inflation Statistics and You

According to figures released today by the Commerce Department, Americans have experienced a 2% price increase in the last three months. Without accounting for food and energy prices, inflation is at an overall 1.3 % in the last three months. Interestingly, when looking at food and energy prices, we see there has been a price increase of 18.7 % when viewed against March of 2009. This means you are paying almost a fifth more for food and energy from last year.
What does all of this mean? For one, it means the cost of living is on a sharp rise. It would normally be hard to explain in a weakened economy how we are seeing such a sharp rise in prices. People are spending less overall than they were in previous years, as many struggle with the effects of a down economy. This should have the effect of lowering prices and the cost of living, and it would, if not for the inflation factor.
Many in the mainstream like to define inflation as a rise in prices. This assessment ignores the cause and identifies the symptom. Inflation is more accurately defined as an increase in the supply of money. As laws of supply and demand dictate, when there is more money competing for the same amount of goods, prices rise. So we actually see rising prices as a result of inflation. Simply put, the Federal Reserve, our nation’s central bank, prints more money, and we in turn have to pay more to feed our families, heat our homes, and fuel our vehicles.
This is by no means a new phenomenon in American history. Since the Federal Reserve bank opened for business in 1914, the dollar has lost 95% of its value. This is a confusing track record for a “quasi-government” agency who is mandated to maintain low inflation and stable prices. All Americans can likely attest to the fact that cost of living is on the rise, while wages struggle to keep up, if they keep up at all. For many Americans, jobs have been lost and wages have actually decreased as part of employer austerity measures. Small businesses are disappearing.  How are Americans supposed to keep up with the harmful effects of inflation, such as an 18.7% price increase in food?
The truth is, though the Federal Reserve might be inflating the currency, (printing more money), so they can bail out Wall St. and help our government fund trillion dollar wars and entitlement programs without raising taxes, the people who are harmed most by inflation are the poor and middle class. Whereas a wealthier family might not have a great deal of trouble adjusting spending habits to accommodate a 20% price rise in food, a family with a strict budget or on a fixed income might now find themselves unable to meet their other monthly obligations. A family in the lowest income brackets might find themselves suddenly unable to make ends meet. This family may be confused, and rightly so, as they haven’t lived more extravagantly – they just find the prices to provide for daily needs have skyrocketed. Such are the hidden and insidious effects of inflation. Inflation is nothing less than a hidden tax on the people, harming those most vulnerable in our society.
Inflation also punishes people who save and invest by diluting the value of the dollar.  Why should you save your money in a bank account, likely bearing under 1% interest, when through inflation, the dollar is becoming less valuable?  If you save money, you literally lose money.  Americans find themselves in a situation of spend, invest, or lose money.  The higher the rate of inflation, the faster money is being devalued.  At what point does even the wisest of investments fail to keep up with inflation?  Through a reckless Federal Reserve monetary policy, we can only expect inflation to be on the rise.
Even more startling than the 18.7% price increase reported by the Commerce Department today are the numbers that show the United States money supply, M3. These figures are no longer published by the Federal Reserve on their website, perhaps because they are “the best description of how quickly the Fed is creating new money and credit”, according to Congressman Ron Paul.  According to Shadowstats.com, a website which still estimates M3, in the below chart, you will see M3 hit 18% between 2009 and 2010. Meaning, the total money supply was at times increasing by 18+% monthly.  It  has been estimated that the monetary base has more than doubled through Fed action.  Although inflation can be unpredictable in proportion to the money supply, it can come as little surprise that we have experienced an almost 19% price increase between this year and last year.

John Williams' M3 Estimate

Sadly, with the way the Federal Reserve and a willing Congress have irresponsibly increased the supply of money and credit, we should only expect more inflation in the near future. With these numbers in front of us, and as evidenced by the ongoing collapse in Greece and the EU, we should not think the recession is over, as so many claim it is. On the contrary, through the “magic” of inflation the true problems have only been papered over with new money.  There is much evidence that this time it is not going to work, and this is why we see the collapse continue in other economies around the world.  This illustrates the potent danger a “quasi-government” organization like the Federal Reserve can wreak on our economy through endless creation of new credit.  When powerful interests such as banks and financial institutions get into trouble, they call on the Federal Reserve to “bail them out”.  The Fed, free of public scrutiny, is more than happy to do so by creating new money.
No person or group should have control over the supply of money and credit.  These kinds of things are best left to the free market.  The free market long ago chose gold and silver as the best money. The framers of the U.S. Constitution knew this, as well as the inherent dangers of paper money, like our federal reserve notes of today.  They had experience with runaway inflation during the war for Independence, and that is why our Constitution strictly calls for gold and silver to be used as money.  One of the most important qualities of gold and silver, and a key reason the Fed and most politicians oppose sound money, is that they can’t be easily counterfeited.  Instead of granting more power to the Federal Reserve, as is being discussed in Washington, we should begin talks about instituting a sound monetary policy based once again on gold and silver.  This will go a long way to putting us on a sound financial footing for the future, while rewarding smart financial behavior instead of failure.