One of the most damaging myths in economics is that effective minimum wages raise living standards. By effective I mean minimum wage rates that are set above market clearing levels. A minimum wage rate set below the market rate is ineffective because those to whom it will apply will either already be on that rate or even above it.
When this happens you can count on an economic idiot like Adele Horin of the Sydney Morning Herald, aka The Saddam Times, to argue that minimum wages do not cause unemployment. And that's exactly what happened. To her the fact that "employment market has not collapsed" is proof that minimum wages rates do not cause unemployment.
Horin's stupidity was summed up by her statement that if our "minimum wage is now the most generous in the industrial world, as the Federal Government claims, we should be celebrating. For once Australia is a leader rather than a follower" (Worker welfare: there's still a big job ahead, 8 May).
This idiocy reminds me of President Hoover's presidential campaign in late 1932 when he boasted:
"For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered . . . They were maintained until the cost of living had decreased and profits had virtually vanished. They are now the highest real wages in the world . . ."
Unfortunately, by this time Hoover's wage fixing policies, based on the discredited purchasing power theory, had driven unemployment up to 24.9 per cent. Although his destructive price-fixing policies provided a mammoth and tragic example of what effective minimum wages rates can do, the lesson still hasn't been learnt by our commentariat, and certainly not by Horin.
What determines the wage rate is labour's marginal product. When the wage rate exceeds the value of this product unemployment emerges. Should the value of the product exceed the wage rate the excess demand for labour will bid wages up until they correspond to the value of the product. This is the point is the point where the labourer receives the full value of his product.
However, according to Horin's clapped out Marxist garbage, minimum wage laws are needed so that "the low paid can really enjoy the fruits of their labour". It never occurred to this brilliant economic analyst to ask one simple question:
"If the low paid are not getting the full value of their labour why aren't all those greedy, selfish, callous capitalists frantically bidding up wage rates in an effort to capture these profits, i.e., the difference between the wage rate and the marginal value of the product?
Even if wage rates were indeterminate they would still continue to rise until profits were competed away.
Marginal productivity theory, which the ever so gifted Adele seems unable to grasp, brings to light another economic insight: should a loose monetary policy raise the monetary value of the product relative to the wage rate the demand for labour will be artificially stimulated, particularly in the case of withheld capacity (The Keynesian Episode by Professor Hutt).
It follows that so long as an expansionary monetary policy allows wages rates to lag behind the value of the product unemployment growth will continue, even with increases in nominal minimum wages.
This implies that the increased minimum would be an ineffective one, meaning that it would have to be smaller than the difference between the existing wage rate and the value of the product. Needless to say, increasing productivity can also have the same effect as an increase in the monetary value of the product. What's more, both can occur simultaneously.
And this I believe is what has happened in Australia. Not only has productivity been increasing but so has the money supply. From January 1996 to May 2004 M1 expanded by more than 100 per cent. This is a huge increase for an 8-year period. Unfortunately, Horin is not the only one who cannot grasp the significance of this expansion.
More than 70 years ago in Australia Professor Benham provided statistical support for the relationship between unemployment and wage rates in excess of the value of labour's production: a relationship that Horin implicitly argues does not exist.
Professor Benham's stats clearly indicate the link between excessive wage rates, output and unemployment.
| Table 1 |
Queensland: Wages, Production
and Unemployment |
| Year |
Average
Wages |
Value of production
per worker |
%.Unemployed |
1916
1917
1918
1919
1920
1921
1922
1923
1924 |
£ d
60 4
65 5
69 6
78 7
91 6
96 8
93 10
94 2
94 11*
|
£
287.60
325.19
316.62
305.40
362.57
338.91
339.84
370.00
424.78
|
5.8
7.0
9.3
11.1
13.3
15.5
10.0
7.1
6.4
|
| *Average for nine months |
As Professor F. C. Benham put it: "It would be hard to find a clearer proof of our thesis [that excessive wage rates cause unemployment]." Benham drew attention to the fact that unemployment rose as wage rates rose "relatively to the value produced per worker…" Table 2 shows the correlation between wages and the annual value of output per employee, making clear the connection between excessive wage rates and the level of unemployment.
| Table 2 |
| Manufacturing: Wages, Production and Unemployment |
| year |
I
Value added
less 10% |
II
Wages |
III
II as % of I |
IV
%.Unemployed |
1910-11
1911-12
1912-13
1913-14
1914-15
1915-16
1916-17
1917-18
1918-19
1919-20
1920-21
1921-22
1922-23
1923-24
1924-25
|
£1000
40,919
46,133
51,708
55,721
57,016
56,802
57,610
63,035
73,289
89,059
99,391
109,507
118,579
127,118
132,423
|
£1000
23,866
27,528
31,287
33,606
34,104
33,211
33,829
33,618
42,506
52,116
62,932
68,051
71,133
77,279
81,360
|
58.3
59.6
60.5
60.3
59.8
58.5
58.7
58.1
58.0
58.1
63.3
62.1
60.0
60.8
61.4
|
—
4.7*
5.5
5.3
8.3
9.3
5.8
7.1
5.8
6.6
6.5
11.2
9.3
7.1
8.9
|
| *For the calendar year 1911. Similarly with subsequent unemployment percentages.
|
Although I have exposed Horin's economic illiteracy and political bigotry one remaining point does need airing: If Horin honestly believes that minimum wage rates do not cause unemployment why did she not argue for a minimum rate of $50 an hour or $75 or even $100 an hour?
I doubt that she has the wit to realise that if she rejected these rates as excessive she would be destroying her own argument.
The following two articles expose Horin's illinformed and bitter leftist views.
Reporter blames Bush for Saddam's crimes
Maligning the US over Afghanistan
Gerard Jackson is Brookes' economics editor