How Minimum Wage Laws Promote Racial Discrimination

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It was over 40 years ago that I first heard Walter Williams speak at a conference. Anyway, I think it was over 40 years ago. It could not have been less.

He and I were on what speakers call the rubber-chicken circuit as early as 1974. We spoke to high school teachers in a program sponsored by the intercollegiate Studies Institute, “The Role of Business in Society,” or ROBIS. As I recall, I had heard him speak before we were on the summer lecture circuit.

I remember very clearly his main point at one of his lectures. He said that minimum-wage legislation discriminates against teenage black males. This has been known by economists since at least the mid-1950′s. The statistical evidence on this was overwhelming. But high school teachers had not heard this.

What made Williams’ speech memorable was the fact that he clarified the reason why the minimum-wage legislation was detrimental to teenage black males. He made the observation, which nobody challenged: the teenage black males are considered undesirables by the general population. In other words, they are discriminated against. They suffer from the stereotypes attached to their particular group.

He asked the obvious question: “How does someone who is part of a group that is discriminated against find a way to prove to somebody doing the discriminating that his assessment is incorrect?” It was really this question: “How do undesirables break through the discrimination against them?”

He made what was considered an obvious point from the point of view of an economist, but which was not obvious to his audience. He said that the person who is discriminated against needs to have a competitive edge that will enable him to compete effectively with members of groups that are not discriminated against. The free market offers such a tool, he said: wage competition. Specifically in the case of competition among potential workers who want to be employed, the most effective competitive edge available is the offer to work for less money per hour. This offer is taken seriously by employers.

Minimum-wage legislation makes it illegal for employers to take advantage of such offers. This removes the most effective single competitive strategy that is available to a person who is considered undesirable because of his membership in a particular group that is widely considered undesirable. This economic analysis applies to all sorts of groups.

Statistically, economists in 1974 knew that unemployment rates for black teenage males began to exceed the unemployment rate for white teenage males when the system of minimum-wage legislation was first enacted by the federal government. The statistics on this go back as far as the legislation.

By focusing on individual offers made by members of undesirable groups to potential employers, Williams focused on microeconomics. He focused on decisions at the margin. This is where economic decisions are made: at the margin.

By making an offer to work for less than members of desirable groups are willing to work for, members of undesirable groups gain an edge in the marketplace. As soon as an employer is made aware of such an offer, he now faces a cost for any future discrimination. If he refuses to take the offer, he is going to have to pay a higher wage to a member of a desirable group. This is going to increase his cost of doing business. In other words, he suffers an economic loss. “Cost” is defined as “that which you have to give up in order to gain what you want.” The employer wants low-cost workers. He wants to pocket the difference between the price he pays for their output and the money he receives from consumers of their output. It is “buy low, sell high.” If an employer refuses to hire someone who has made an offer to work for less, this increases his cost of doing business. From an economic standpoint, this imposes the cost of discrimination on the employer.

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