by Dr. Roy Cordato
Senior Economist, Emeritas
During the period of apartheid in South Africa, all-white labor unions representing workers in the diamond mines were able to have put in place minimum wage laws for diamond mine workers. At the time lower skilled black workers were competing with white workers and taking “their jobs.” The all-white unions were quite upfront about their motives in supporting the minimum wage. They wanted to stop black workers from competing with them and knew that a minimum wage that was high enough would price them out of the market.
In modern day America, labor unions always support increases in the minimum wage. And the minimum wage increases that they support have similar effects as those supported by those white labor unions in South Africa. They price their competition out of the labor market. I don’t believe that these American labor unions are acting on racist motives, as they explicitly were in South Africa. No, I believe that their motives are colorblind, although the minimum wages that they support are likely to have a disproportionate effect on African Americans and other minorities, most likely Latinos.
Now, of course the unions’ stated motives are always quite benevolent, even altruistic. They typically argue out of a “concern” for the downtrodden. They claim that no one should have to work for less than “a living wage” and that workers in the lower paid trades and services are being exploited by greedy employers. But remember, regardless of stated motives, minimum wage laws, in fields where lower skilled workers compete with higher skilled workers, have the effect of pricing many of those lower skilled workers out of the market.
A simple example can highlight my point. Imagine that you have a contractor who needs to have a house painted. I choose house painting because this is an area where one might find a significant difference in the skill level among workers and is also an occupation that is often unionized. (This could also be true of restaurant, grocery, or department store workers.) So, imagine that the contractor is faced with two different options. One option is to turn to the local painters’ union and hire two skilled and experienced union painters who can do the job in two days. If the union scale is $25 per hour, it will cost the contractor $50 an hour to hire the union painters. Let’s call this option A.
Now assume that this contractor is also presented with an alternative option, B. There are a group of 4 recent high school graduates who, working together, are trying to earn a living painting houses. Now because these neophytes are less experienced and less efficient than the union painters it will take all 4 of them to do the same job in the same amount of time, 2 days, as the union painters. But because they are not as skilled as the union workers they are charging $12 each per hour for their services.
Given that the contractor is faced with paying $50 an hour for the union workers or $48 an hour for the less experienced, start-up, and non union painters, his choice is clear. He will save $2.00 an hour by choosing option B. In other words, the lower skilled painters are successfully competing with the higher skilled union painters by charging less per hour, an amount that is commensurate with their lower skills. They are less efficient but they are offering the contractor what economists call a compensating difference in their wage.
Warning, this article is about to become decidedly snarky and sarcastic.
Let’s assume that the painters’ union notices that this is happening, not once or twice but over and over again, and they decide they have to do something about it—something that doesn’t include lowering their pay scale by a couple bucks to be more competitive. The union leaders contact their lobbyists in Washington, D.C., the state capital, or at city hall and explain to them what’s going on. Using their vast resources, they begin a lobbying and public opinion campaign, which includes picketing contractors decrying the exploitation of these poor workers and proclaiming the injustice of paying anyone less than $15.00 an hour. After all, everyone deserves a living wage. And heck, the union may even be joined by some contractors in their efforts, those that are already hiring the $25 per hour workers and find themselves being outbid by contractors who are choosing option B. Of course, they too feel that this it an injustice to pay these upstart painters only $12 an hour.
So the unions succeed in their altruistic cause and get the minimum wage raised to $15. What happens in the example above? Not only are the young upstart painters priced out of the market, at the $15 minimum option B is now $60 an hour, but the union can (coincidentally of course) raise its wage as high as $30 an hour. Even better, the union ends up getting patted on the back by progressive non-profits and self-styled advocates for the poor for caring about social justice.
One last point I forgot to mention – these non-profits, again coincidentally, receive large contributions from the painters’ union.