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Minimum wage lies v the US economy and the Victorian Libs
Gerard Jackson
As it looks like the Bracks’ Government is going to use Prime Minister Howard’s industrial reform legislation to bludgeon the Victorian Liberal Party in the November election it should pay us to take a brief look labour markets and minimum wage laws.
The American experience is being used to attack the fundamental economic law that pricing any product above its market clearing price will create a surplus. With respect to labour we call this phenomenon unemployment. However, Ross Gittins, the Sydney Morning Herald’s brilliant economist, argues otherwise. (US job market meaner, 13 February 2006).
Gittins’ comment that a “high proportion of America’s male population hidden away in jail” is really “hidden unemployment” that artificially lowers the US unemployment rate gives us some idea of just how clever this clown really is. Let us put the US job record in its historical perspective, something that never occurred to Gittins.
From 1970 - 2005 the US economy created 64 million new jobs. During the same period. If we take the period 1990 - 1999 we find that the US generated 14,695,000 new jobs, an increase of 12.4 per cent. For the same period the EC created about 4 million which was about 3 per cent. Most of these jobs were in the government sector. As Michael Cox and Richard Alm point out in Myths of Rich and Poor, “private employment actually fell [in the EC] between 1970 and 1994.
If we take in to account the number of illegal immigrant we find that US employment figures have been greatly underestimated. This is an old problem. In his book The Theory of Idle Resources (LibertyPress 1977, first published 1939) Professor W. Hutt brought attention to fact that about 800,000 illegals were slipping into the country each year, all of whom were finding work — and still are.
These figures, all of which are easily available, make a mockery of Gittins insinuation that the US prison population is artificially lowering the unemployment rate. Trying to do further damage to American economy’s remarkable job record, Gittins states that if we
... focus on the employment of men aged 25 to 64 ... you find the tables are turned: we do better (83 per cent) than they do (81 per cent). In other words, their male employment rate overall is higher than ours only because they have higher employment among youth (15 to 24).
Gittins’ theme is that the “US example offers no support for” for the argument that cutting the minimum wage will reduce unemployment. His proof: “the US minimum wage is very much lower than ours, but more of our least-educated people [marginal workers] have jobs than their least-educated do”.
To his view that a single minimum wage rate prevails throughout the US is utter nonsense. In addition to the Federal mandated minimum wage rate — the one Gittins is clearly referring to — the states also have their own minimum rates. The rule is that the highest rate should always prevail. For example, though the Federal minimum is $US5.15 the rate in California is $6.75, Connecticut is $US7.10, Washington is $US7.35 and Oregon is $US7.25.
Now the following gem from Gittins deserved to be quoted in full:
So the US system has produced lower pay for least-educated people, but not more jobs. The economists' knee-jerk assumption that lower wage rates lead to higher employment proves to be wrong in this case.
How could any sensible economic commentator make such a statement in light of the fact that the US economy has created 64 million new jobs in 34 years? Moreover, 4.7 million of those jobs were created from August 2003 to December 2005. What in heavens name is Gittins smoking?
Repetitive as this might appear, allow me to stress that it is a fundamental law in economics that if the cost of labour is raised in excess of the value of its marginal product unemployment will emerge. What Gittins did is deny this theory by slipping into a vulgar version of the indeterminacy theory of wage rate determination.
Reading Gittins’ articles demonstrates just how bad economic commentary is in this country. And for those of you who think I am picking on Gittins for political reasons, I want to make it clear that in my opinion some so-called defenders of the market are not much better.
Note: It’s important to know what the likes of Gittins’ has to say on labour markets. Victoria faces an election in November and Premier Bracks intends, so I am told, to make the Government’s labour reform legislation a political issue. I have no doubt that Gittins’ claptrap is the kind of ammunition that Bracks will fire at his Liberal opponents.
Unfortunately I do not know of a single Victorian Liberal who is capable of refuting this twaddle in the kind of English that every man understands. I shall go even further and state that I doubt if any Liberal politician in Victoria really understands the nature of labour markets.
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 27 February 2006