the review – 2 of 1999

First Published: 1999-07-28

More on the Minimum

The Business Editor of The Tribune responded to the Institute again in an editorial "Tourism packages and the minimum wage." (Friday, April 23, 1999, Section B, page 1.) The first half contained a proposed tourism marketing strategy for the Bahamas; and the second took strong exception to the Institute on the Minimum Wage.

Our disagreement with the Editor has its basis in the way we look at an imperfect and changing world. On the one hand he recognizes that there is an international tourism market; and… on the other hand he seems to deny that there are markets for labour services. In these markets there are "transactors" on both sides. An employer has a real need for honest, hard working and skilled employees… and in his self-interest he pays them enough to keep them from leaving and going elsewhere. Workers… Bahamians included… do leave if it is in their self-interest to do so.

Now let-s look at the quotation of Dr. Walter Williams… "Why is it better for a youngster to be unemployed at $3.20 per hour than to be employed at $2.00?" This question from the 1980s was not fully answered by the Institute. The Business Editor of The Tribune is quite right. He did not say that an unemployed youngster at $3.20 is better off… he just doubted that he would be laid-off.

The data.

Dr. Williams was concerned with the impact of the minimum wage on disadvantaged teens and those with low skill levels. The data available at that time showed those black and white teenage unemployment rates in 1948 were about the same- 9.4% for black and 10.2% for white teens. "But as the minimum wage rose in the 1960s and 1970s, the unemployment rate for blacks roughly doubled compared with whites- to 37.7 percent for black teens by 1980, compared to 18.5 percent for white teens."

The passage of time has not altered the story. The data of the U. S. Department of Labor for the 12-year period 1983 through 1994 shows a continued strong positive relationship between the minimum wage and unemployment when the minimum wage is adjusted for price changes to produce a "real minimum wage." The summary of this data by a Dallas based research group is as follows:

  • "Teenage unemployment rates fell from the 22-23 percent range in early 1983 to less than 15 percent by the beginning of 1990, at the same time that the real minimum wage was falling from about $5.15 to under $4.00 (in late-1994 dollars).

     

  • "The minimum wage rose in two steps in 1990-91 and teenage unemployment rose with it, peaking a few months after the new minimum peak in the second quarter of 1991.

     

  • "Subsequently, teenage unemployment rates fell, although not to the low levels of 1989 or early 1990, coinciding with the decline in the real minimum wage because of inflation.

"On the whole, the teenage unemployment rate moves in tandem with changes in the real minimum wage."

The politics.

There is a strong contrast between the economic facts of life and the political fact that minimum wage proposals have universal appeal. Why is there a divergence of economics and politics? The answer is –

A minimum wage is something concrete that a government can do for the less fortunate. Voters demand action on their behalf and politicians respond even though the action hurts the disadvantaged… the action has unintended consequences. The desire to be compassionate is part of the Judaic-Christian ethic and the minimum wage appears as a logical derivative of that tradition. The economic results, however, are completely different.

The minimum wage is a symbol of intention but it harms its intended beneficiaries… the disadvantaged.

Wage prostitution.

The Editor urges the Bahamas to compete for the tourist dollar but he characterizes an individual-s action in the labour market… including his own… as "prostitution for the almighty dollar."

A wage is simply a special price, specifically the price of labour services. The labour market works like most other markets… when other things are held constant, if prices go up, buyers will buy less. The Editor-s colorful description of market activity and "bad guy" companies is grossly misleading.

The Road Less Traveled.

Should the Bahamas follow the lead of America and take the advice of the Business Editor of The Tribune?

A minimum wage is a political symbol and an economic illusion that politicians use to gain popular support.

It takes toughness and vision for a society to give up such symbols and illusions. The willingness of countries to take the easy and popular road in economic development… to keep their symbols and illusions… has left many of them vulnerable to great risks. Recent events in Jamaica illustrate this point. Nevertheless, this is what the Bahamas should do… it should drop the minimum wage proposal… it should take "The Road Less Traveled."

Help support The Nassau Institute