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Minimum wage would hurt the most vulnerable

I read the reports in The Royal Gazette entitled “Calls for a living wage in Bermuda” of April 22, and “Minimum wage would mean more jobs for Bermudians” of April 24 with a mixture of incredulity and sadness that several community leaders would put their reputations behind such incredible ignorance of basic economics.

It is some years since I taught economics but if I was marking the economic logic behind their respective views I would be compelled to give all participants an “F” grading.

Why such a harsh and uncompromising opinion?

Well for a start, in the April 22 report it is stated “there was no real evidence that instituting a living wage would increase unemployment, suggesting it could actually help create jobs”. Really?

Let me just mention that the participants are obviously unfamiliar with modern research on the employment effects of minimum wages. Here’s a list from the United States of only five of the more prominent, recent scholarly empirical studies whose authors conclude that even modest hikes in minimum wages destroy jobs:

• Jeffrey Clemens, The Minimum Wage and the Great Recession: evidence from the current population survey 2015 finding that minimum-wage increases during the Great Recession “reduced employment among individuals ages 16 to 30 with less than a high-school education by 5.6 percentage points”.

• Jonathan Meer and Jeremy West, Effects of the Minimum Wage on Employment Dynamics, 2013, finding that “the minimum wage reduces job growth over a period of several years. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers”.

• David Neumark, J.M. Ian Salas, and William Wascher, More of Recent Evidence of the effects of Minimum Wages in the United States, 2014 finding that “the best evidence still points to job loss from minimum wages for very low-skilled workers — in particular, for teens”.

• Yusuf Soner Baskaya and Yona Rubinstein, Using Federal Minimum Wages to Identify the Impact of Minimum Wages on Employment and Earnings across the United States, 2012, finding that “minimum wage increases boost teenage wage rates and reduce teenage employment”.

• The textbook, Economics: Principles and Policies, by William Baumol and Alan Blinder, states that “the primary consequences of the minimum wage law is not an increase in the incomes of the least-skilled workers but a restriction of their employment opportunities”.

Indeed, you can read a whole book on the subject by David Neumark and William Wascher, Minimum Wages, 2008, that concludes minimum wages destroy jobs.

In a survey released last month, the publication Nation’s Restaurant News asked 319 restaurant operators to name their biggest challenge for 2017 — 24 per cent replied “raising minimum wages”. Even the normally left-leaning World Bank has research on the damaging impact of minimum-wage mandates. The results indicate that minimum wage policies contribute to higher unemployment rates, especially for young people and women.

I could continue with more citations, but I think the above provide substantial evidence that a government-imposed living wage destroys jobs.

So why would the panel, composed of rational, well-meaning people, deliberately mislead the Bermuda public? Let me suggest only one.

Supporters of the living wage do not think. They “feel” — they emote — they grandstand. They do not analyse. They do not look at the evidence. They do not reason. They do not understand that people produce, and if they produce a value less than the hourly living wage, they will be unemployed. They believe that with magic words they can make harsh economic realities vanish. They live in a make-believe world of good intentions. High wages can only happen if employees are able to produce services or goods that are worth at least say $50,000 per year. If they cannot do that, passing a law that states that employers must pay $50,000 is an exercise in futility.

Parliament can pass a law saying that employers must pay at least that amount, but it cannot pass a law saying that employers must employ people at that rate because no one would obey it. Employers would simply go out of business or cease to operate — and that has happened both in Bermuda and overseas.

It ought to be obvious that a living-wage law would hurt most the very people it is designed to “protect”. Namely, those with minimal skills. When a law exists that no one is to be paid less than $50,000 per annum, then no one whose services are not worth that to an employer will be employed at all.

Government cannot make a person worth a given amount by making it illegal for anyone to offer him less. It simply deprives that person of the right to earn the amount that his abilities and opportunities would permit him to earn, while the community is deprived of the moderate services that person is capable of rendering. In short, for a low wage, we substitute unemployment.

One of the consequences of what the panel is proposing is that the most vulnerable in society (and that means black youths) will be penalised the most by the implementation of a living-wage Act of Parliament. No one in their right mind would want this to happen, yet that will be the likely outcome of what the panel is proposing.

There is also a moral dimension. During South Africa’s apartheid era, racist unions, which would never accept a black member, were the major supporters of minimum wages for blacks. In 1925, the South African Economic and Wage Commission said: “The method would be to fix a minimum rate for an occupation or craft so high that no native would be likely to be employed.” Gert Beetge, secretary of the racist Building Workers’ Union, complained: “There is no job reservation left in the building industry, and in the circumstances, I support the rate for the job (minimum wage) as the second-best way of protecting our white artisans.”

Similar views were expressed by unions in Australia, Canada and the United States.

The Bermuda public would be aghast if they knew that the original push for the minimum wage was explicitly designed to raise the price of labour so that employers would only hire the right kind of worker, namely white Anglo-Saxon men. As Milton Friedman explained in his best-seller book Free to Choose: “The minimum-wage law requires employers to discriminate against persons with low skills. The high rate of unemployment among teenagers, and especially black teenagers is both a scandal and a serious source of social unrest — yet it is largely a result of minimum wage laws.”

The reader may be asking how I would like to live on a low wage of around $10 an hour? The answer is, of course, I wouldn’t like to live on just $10 per hour. Yet, even less would I like to live on $0.00 per hour, which is the hourly income of people rendered unemployable by the proposals of the panel.

A government-mandated living-wage law locks out of the labour market every person whose labour is valued by employers at less than the government-mandated minimum.

Let me conclude by stating that making it illegal to pay someone less than a government-mandated living wage puts those with less experience or skills at a significant disadvantage. In Bermuda, that mainly applies to young, black Bermudians.

They face a classic Catch-22 dilemma. In such circumstances, a young job applicant may be faced with a conversation like this:

“Do you have experience?” the employer asks.

The teenager is honest and shows initiative by answering, “No, but I’m willing to work at a lower wage to gain experience.”

“Sorry,” the potential employer says. “I would be breaking the law if I hired you for any amount less than the living wage. I can hire someone older and with more experience at the same wage the government says I have to pay you.”

“But I can’t get experience if you won’t hire me,” pleads the teenager.

“Tough luck. Complain to your MP or to Craig Simmons, or to Sheelagh Cooper, or to Cordell Riley, or to Lynn Winfield, or to Chris Furbert, or to Phil Perinchief, or to Rolfe Commissiong. Do not blame me — I only own and operate a business.”

The living wage is a perfect example that good intentions combined with bad economic theory results in harm to the very people who need help.

It is the height of absurdity to believe that the way to prosperity is to outlaw work for vulnerable people. Why the panel would favour a policy that creates unemployment, is racially discriminatory, and penalises those with least advantage in society is not only a mystery, but something of a scandal.

• Robert Stewart is the author of A Guide to the Economy of Bermuda