Politics & Policy

Minimum Interference

Market restrictions hurt.

Hong Kong has been a beacon of free-market capitalism for decades. The Economic Freedom of the World report, published by the Fraser Institute in Canada, has ranked Hong Kong as the world’s freest economy since 1970. Few people doubt that the free market served the people of Hong Kong very well: According to the World Bank, Hong Kong’s per capita income, when adjusted for purchasing-power parity, was $27,490 in 2002. That is $910 more than a comparable figure for the United Kingdom, Hong Kong’s former colonial master. Hong Kong’s unique transformation from a barren rock to one of the world’s richest countries serves as an inspiration to poor nations around the world.

What is not unique is the struggle waged by those who wish to save Hong Kong’s free-market economy from political interference, which, though it is based on good intentions, is often harmful in practice. Hong Kong’s legislators, who wish to institute minimum wage, no doubt feel that they are benefiting workers. Indeed, some workers would see their incomes rise. But there will be unseen victims of the law–those who will either lose their jobs or will not be hired in the first place, thus contributing to the rise of Hong Kong’s 7.2 percent unemployment.

Wages, like other prices in the marketplace, behave according to the laws of supply and demand. If prices go up, demand goes down. When the cost of labor becomes more expensive, fewer people get hired. Oversupply of labor, which increases when the cost of labor is higher than the market rate, is known as rising unemployment. In 1946, George Stigler, a Nobel laureate, pointed out that the minimum wage negatively affects the level of employment. Stigler’s view now enjoys near-total acceptance in the economic profession. The question, therefore, is not whether–but how much–the minimum-wage law would hurt the people of Hong Kong. To get an idea, let us look at the experiences with similar measures in the United States.

The American minimum-wage law was enacted in 1938. The hourly wage was set at 25 cents an hour, or 40 percent of the actual average wage. Merely one year later, the federal government had enough data to conclude that between 30,000 and 50,000 people lost their jobs throughout the country as a direct result of the minimum wage. That was 65 years ago, and the minimum wage is still with us–having increased 20 times in nominal terms.

Historically, the greatest impact of the law has been on workers with low skills. Low-skilled workers compete for jobs with more skilled but better paid workers. Increases in the minimum wage, therefore, price low-skilled workers out of the job market. That suits trade unions, whose primary concern is to protect the jobs of the existing, well-paid, and unionized laborers. However, uunionized workers only make up a small percentage of the labor force. As a result, minimum wages have had a disproportionately negative affect on young people and ethnic minorities.

A 1998 OECD study found that a 10 percent increase in the minimum wage reduced teenage employment by 2 to 4 percent. Those conclusions were similar to those of the federal Minimum Wage Study Commission, which found in 1981 that each 10 percent increase in the minimum wage reduced teenage employment by 1 to 3 percent. In addition, a 1995 study by the National Center for Policy Analysis found a strong correlation between fluctuation in the real minimum wage and unemployment. Because of inflation, the real minimum wage in the United States declined from $5.15 to $4 between 1983 and 1990. Teenage unemployment fell from about 23 percent to less then 15 percent over the same period. When the real minimum wage rose in 1991, teenage unemployment rose as well.

Equally disconcerting is the effect that the minimum-wage law has had on black Americans. Between 1948 and 1995, the black-teenage-male rate of unemployment increased from 9.4 percent to 37.1 percent. The white-teenage-male rate of unemployment, however, only rose from 10.2 percent to 15.6 percent over the same period. As Walter Williams, an American economist, showed in his research of the United States and South Africa, the minimum wage increases black unemployment by diminishing the cost of discrimination. Profit-maximizing business owners hire more minorities with low skill levels and correspondingly lower wages. When the minimum wage eliminates price competition, racially discriminatory views are no longer offset by negative financial consequences and minority unemployment increases.

Overall, the case against minimum-wage legislation in the United States is overwhelming. Hong Kong’s economy functions according to the same laws of economics and it is, therefore, likely that minimum-wage legislation there will result in unintended negative consequences and harm the very people whom it is supposed to help.

–Marian L. Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute.

Marian L. TupyMr. Tupy is a senior fellow at the Cato Institute’s Center for Global Liberty and Prosperity and the editor of HumanProgress.org.


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