How Minimum Wage Laws Promote Racial Discrimination
It was over 40 years ago that I first heard Walter Williams speak at a conference. Anyway, I think it was over 40 years ago. It could not have been less.
He and I were on what speakers call the rubber-chicken circuit as early as 1974. We spoke to high school teachers in a program sponsored by the intercollegiate Studies Institute, "The Role of Business in Society," or ROBIS. As I recall, I had heard him speak before we were on the summer lecture circuit.
I remember very clearly his main point at one of his lectures. He said that minimum-wage legislation discriminates against teenage black males. This has been known by economists since at least the mid-1950's. The statistical evidence on this was overwhelming. But high school teachers had not heard this.
What made Williams' speech memorable was the fact that he clarified the reason why the minimum-wage legislation was detrimental to teenage black males. He made the observation, which nobody challenged: the teenage black males are considered undesirables by the general population. In other words, they are discriminated against. They suffer from the stereotypes attached to their particular group.
He asked the obvious question: "How does someone who is part of a group that is discriminated against find a way to prove to somebody doing the discriminating that his assessment is incorrect?" It was really this question: "How do undesirables break through the discrimination against them?"
He made what was considered an obvious point from the point of view of an economist, but which was not obvious to his audience. He said that the person who is discriminated against needs to have a competitive edge that will enable him to compete effectively with members of groups that are not discriminated against. The free market offers such a tool, he said: wage competition. Specifically in the case of competition among potential workers who want to be employed, the most effective competitive edge available is the offer to work for less money per hour. This offer is taken seriously by employers.
Minimum-wage legislation makes it illegal for employers to take advantage of such offers. This removes the most effective single competitive strategy that is available to a person who is considered undesirable because of his membership in a particular group that is widely considered undesirable. This economic analysis applies to all sorts of groups.
Statistically, economists in 1974 knew that unemployment rates for black teenage males began to exceed the unemployment rate for white teenage males when the system of minimum-wage legislation was first enacted by the federal government. The statistics on this go back as far as the legislation.
By focusing on individual offers made by members of undesirable groups to potential employers, Williams focused on microeconomics. He focused on decisions at the margin. This is where economic decisions are made: at the margin.
By making an offer to work for less than members of desirable groups are willing to work for, members of undesirable groups gain an edge in the marketplace. As soon as an employer is made aware of such an offer, he now faces a cost for any future discrimination. If he refuses to take the offer, he is going to have to pay a higher wage to a member of a desirable group. This is going to increase his cost of doing business. In other words, he suffers an economic loss. "Cost" is defined as "that which you have to give up in order to gain what you want." The employer wants low-cost workers. He wants to pocket the difference between the price he pays for their output and the money he receives from consumers of their output. It is "buy low, sell high." If an employer refuses to hire someone who has made an offer to work for less, this increases his cost of doing business. From an economic standpoint, this imposes the cost of discrimination on the employer.
Williams understood that some employers, meaning employers at the margin, want to gain a competitive edge against other employers. They will therefore be willing to accept offers from certain individuals who are willing to work at wages that are lower than average in the industry. By making the offer, the member of an undesirable group imposes the cost of discrimination on anybody who will not accept his offer.
There is no question about the origin of minimum-wage legislation. It came from trade unions. Trade unions did not want to face competition from workers who were not members of a union. They wanted to make it illegal for businessman to take advantage of offers to work for less than what the trade union members were able to extract from employers, based on their monopolistic position in the industry. The federal government, through the Wagner Act of 1933, had made it illegal for businesses to offer low-wage jobs, if half of the employees, plus one, voted to unionize the business.
What was happening, union leaders understood, was that blacks were in a position to break the stranglehold of the unions in some industries, because they could go to employers and use their competitive edge: a willingness to work for less money per hour. The way to stop this, the union leaders understood, was to make it illegal for any employer to hire anyone at a wage below the mandated minimum wage. This would stop competition against trade unions.
From a political standpoint, it was incumbent on the trade unions to keep the voters, and also keep Congressmen, from recognizing that minimum-wage laws are discriminatory against groups that already suffer from discrimination. It was seen as politically incorrect in the late 1960's to discriminate against blacks, but this was what minimum-wage laws did from the beginning. So, it was imperative that this line of reasoning be kept away from students in colleges and universities. This was why Williams' argument was devastating. Students and teachers could not refute it. It made them feel guilty, because they were pushing for legislation that imposed additional burdens on members of racial minorities who were already suffering from discrimination. The laws took away the victims' most effective tool for getting employed, and therefore getting an opportunity to prove their worth to their employers and also to coworkers.
The high unemployment rates for young adults in Greece and Spain -- in the range of 50% -- are the result of the same regulatory process. The trade unions can block offers to work for less. Members of groups that are discriminated against -- non-union workers -- cannot get employers to accept their offers to work for less. It is illegal for employers to accept these offers.