Friday, 5 August 2011

How minimum wages encourage discrimination

Yet another unfortunate consequence of minimum wages is the encouragement it gives for discrimination. Karthik Reddy writes on this point over at the IEA blog. She explains,
The free market is a powerful tool that forces market participants to pay for their discriminatory tendencies. In a free market system, for example, if a discriminatory employer would like to hire a worker to do some task, and the employer is, say, disinclined to hire blue-eyed workers, he must be willing to pay for the extra cost of brown-eyed labour if he follows his discriminatory tendencies; blue-eyed labourers faced with such discrimination may compete on the basis of price and lower the wage they receive.

A wage floor, however, prohibits workers from competing amongst one another on the basis of price, and removes economics from the discriminatory employer’s decision-making process. The employer must pay potential labourers, whether blue-eyed or brown-eyed, the same wage, and because the equal wage ensures that this employer will pay no price to discriminate against the blue-eyed worker, he is free to make his hiring decision on some basis other than price and productivity, and will hire the brown-eyed worker.
Such an outcome is in this day and age an unintended consequence of minimum wages but a consequence none the less.

Reddy continues,
This theoretical discussion is not without real-world evidence; there have been instances in societies with significant racial animosity of the use of wage floors as tools to deliberately diminish the labour participation of certain groups. In the early twentieth century southern United States, for example, racist activists trying to exclude black Americans from the workforce found minimum wages to be an effective tool to accomplish this insidious goal in a seemingly inoffensive way.

In 1909, the prejudiced Brotherhood of Locomotive Firemen demanded that the Georgia Railroad fire all Black workers. Economist Walter Williams observes that instead of such a transparent and overtly discriminatory measure, the exclusion was accomplished through the imposition of wage controls: ‘Instead of eliminating blacks … the arbitration board decided that black firemen, hostlers, and hostlers’ helpers should be paid wages equal to the wages of white men doing the same job.’1 The strategy satisfied white unionists, who knew that when forced to pay an equal wage to blacks and whites, discriminatory employers would no longer pay any cost for their discrimination and would hire white workers at the expense of blacks. The union stated: ‘If this course of action is followed by the company and the incentive for employing the Negro thus removed, the strike will not have been in vain.’

Similarly, white supremacist groups in South Africa under apartheid pushed for minimum wage laws as a way to reduce black participation in the labor force. The overtly racist Mine Workers Union, for example, demanded a minimum wage to protect their dominance in the workplace and openly stated: ‘The real point on is that whites have been ousted by coloured labour. It is not because a man is white or coloured, but owing to the fact that the latter is cheap … when that [minimum wage] is introduced we believe that most of the difficulties in regard to the coloured question will automatically drop out.’ Similarly, the South African Wage Board, which set minimum wages in different sectors of that country’s economy beginning in 1925, ‘concentrated its wage determinations only on those areas of industry where nonwhites were in competition with whites, and made no wage determinations in areas where there was no such competition.’
As noted above, modern minimum wage laws are not, we hope, imposed with such underhanded or targeted intentions. But it still turns out that the use of minimum wages to achieve discriminatory ends is indicative of the ability of wage floors to erase the cost employers must pay to discriminate. And demand curves slope downwards, as something gets cheaper you get more of it. So whether or not it is intentional it has to be recognised that discrimination increases to the extent that minimum wages rise above the market wage.

1 comment:

Horace the Grump said...

Roger Kerr was making basically the same point and using the same examples over at