The “substitution effect.”

I have written frequently about the minimum wage:

Today we will examine why it is that certain businesses support minimum wage increases. You can rest assured it has nothing to do with “altruism.” They are looking for the “substitution effect.”

There is near unanimous agreement among economists that increases in the minimum wage lead to increases in unemployment. What the economists debate is the magnitude of the increase.

[Source: Minimum Wage and Discrimination, by Walter E. Williams}

[Professor Williams enlightens us] An issue not often included in minimum wage debates is the substitution effects of minimum wage increases. The substitution effect might explain why Business for a Fair Minimum Wage, a national network of business owners and executives, argues for higher minimum wages. Let’s look at substitution effects in general.

When the price of anything rises, people seek substitutes and measures to economize. When gasoline prices rise, people seek to economize on the usage of gas by buying smaller cars. If the price of sugar rises, people seek cheaper sugar substitutes. If prices of goods in one store rise, people search for other stores. This last example helps explain why some businessmen support higher minimum wages. If they could impose higher labor costs on their less efficient competition, it might help drive them out of business. That would enable firms that survive to charge higher prices and earn greater profits.

There are other substitution effects that are less obvious. Professor Williams provides a good example. You are about to hire a typist. There are some who can type 40 words per minute and others, equal in every other respect, who can type 80 words per minute. Whom would you hire? Clearly, one would hire the more highly skilled. Thus, another effect of the minimum wage is discrimination against the employment of lower-skilled workers. However, if you weren’t required to pay “the minimum wage” and the less skilled person was willing to work for half that wage, you might change your mind.

When one recalls that South African Apartheid Unions were the biggest supporters of minimum wage increases for blacks one must wonder about the more obscure “substitution effects.” The rationale was to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed. never forget that “Equal pay for equal work” was the rallying slogan of the South African white labor movement.

Wait, say you, that is not the intention in our nation. You are likely correct today, but in the 1930s when the first minimum wage law was passed (Davis-Bacon Act) congressional supporters made such statements as, “That contractor has cheap colored labor that he transports, and he puts them in cabins, and it is labor of that sort that is in competition with white labor throughout the country.”

Think about it. As I have said many time, I support any individual’s right to be an altruist, BUT IT IS NO WAY TO RUN A GOVERNMENT.

Roy Filly



About Roy Filly

Please read my first blog in which I describe myself and my goals.
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