Her’s a fantastic idea that will make everybody richer. Let’s pass a law setting a minimum price on used cars. How about, say, $15,000?
If you’ve got an old beater you want to sell, and you were worried that you’d only get a couple thousand bucks for it, then this law is for you! Now you’ll get $15,000 for it!
This law would help the least fortunate Americans most of all. Those with the lowest incomes tend to own the oldest cars in the worst condition. With this law, they’ll be assured of getting a terrific price.
There’s just one problem. There are lots of used cars that no one wants to buy for $15,000. If you want to sell one of those, under this new law chances are that you wouldn’t be able to sell it at all. The $15,000 minimum prices you right out of the market.
And the poor people whom this law was supposed to help? They’d actually get hurt two ways by it. Not only would they not be able to sell their used cars, at the same time, they wouldn’t be able to buy a used car either — since now they’d have to pay $15,000 for it, which they can’t afford (and which it probably isn’t worth, anyway).
So who would support a law this stupid? Well, actually, you might — without even realizing it.
If you support minimum-wage laws, then you’re supporting the very same logic underlying this crazy idea of a minimum price for used cars. (Thanks to Don Boudreaux1, an economist at George Mason University, for the colorful metaphor.)
If a law forces employers to pay no less than, say, $10 an hour, then employers will simply not hire anyone for jobs that are really worth less than that. And they’ll fire anyone who was doing those jobs at a lower wage, before the law was passed.
Which leaves the low-wage earner with a rather stark choice: Would he rather be employed at $9 an hour, or unemployed at $10 an hour?
Don’t kid yourself that employers will just bite the bullet and pay up for jobs that aren’t worth the legal minimum. They won’t.
Consider what happened in France, where there is a minimum wage roughly twice that mandated in the United States. Go to a grocery store or a toy store there. There are hardly any clerks to help you. No baggers to pack up your stuff when you check out. Merchants simply can’t afford to pay the too-high minimum wage for this kind of work.
So two things happen. First, you waste your own valuable time having to find what you want without help and bagging your own orders. Second, low-skilled workers who would normally be clerking and bagging — if the high minimum wage hadn’t eliminated those jobs — are simply unemployed. The minimum wage in France may be double that of the U.S., but so is the French unemployment rate.
And that high unemployment rate is persistent, too. Without low-wage entry-level jobs, unskilled French workers — especially youths and minorities — have no way to acquire the skills necessary to work their way up to higher-paying jobs.
As a result, minimum-wage laws end up not just harming certain individuals, but setting back the growth rate of the entire economy. They distort the optimal use of skills in the economy — why should I have to do my own bagging? And they keep low-skilled entry-level workers permanently out of the work force. In the long run, where is the work force going to come from?
It’s easy to think sentimentally and sympathetically of the workers who get stuck in low-skill, minimum-wage jobs for a lifetime — and imagine that a minimum-wage law would help those people. But the reality is that, in the United States, there are very, very few workers earning the minimum wage. Most minimum wage jobs are held only for a short time, by teenagers and part-time workers, for whom such jobs are merely a temporary hardship on the way to something better.
The issue of minimum-wage laws is hot right now, because there’s an election coming up. There’s been lots of agitation in the U.S. Congress to raise the federal minimum wage, and several states will have their own minimum-wage laws on the ballot this November.
While individual members of both political parties have their own views on the minimum wage, traditionally it’s been a Democratic issue, probably because, historically, the Democratic party has drawn support from labor unions. According to the New York Times, the Democrats are trying to get minimum-wage laws on as many state ballots as possible this November, in order to attract voters to the polls. It’s the same strategy the Republicans used in the last election, with state ballot initiatives to ban same-sex marriage.
So most of what you’ll hear about the minimum wage over the next couple months is going to be pure politics — from both sides. Try to listen skeptically.
For me, I know from my own career experience that, sometimes, it can be a very good thing to work for nothing. And nothing is as about as far below the minimum wage as you can get.
When I first started as a trader 25 years ago, my only income was my trading profits. I did well from the start, but I started small. So for quite a while my expenses ate up all my profits — and there was nothing left over for me at all.
But those early years were years of learning. Living in poverty was my “tuition” — a price I had to pay when I was young to develop the skills that started me on what turned into a high-income career in trading and investment management.
I hate to think where I’d be today if there had been a law that made it illegal for me to start my own trading operation 25 years ago, just because I couldn’t pay myself a minimum wage at first.
Fortunately, the magnitude of minimum wages being mandated by most of the initiatives on ballots this November is modest. Nobody’s talking about taking us up to levels like the ones in France.
But as an investor, stay on high alert. In politics, the road to hell is paved with good intentions — and the longest journey down that road begins with a single bad law. Remember, the S&P 500 lost 25% of its value in early 2002 while Congress was creating the well-intentioned economic disaster known as Sarbanes-Oxley.
The above is an “Ahead of the Curve” column published July 14, 2006 on SmartMoney.com, where Luskin is a Contributing Editor.