Knowledge And Decisions

The “exploitation” explanation of low wages tends to emphasize the intentional morality of the employer (“unconscionable”) rather than the systemic effects of competition. Nothing is more common in economics than the attraction of new competitors whenever and wherever there is a profit above the ordinary. If hiring low paid workers presented such an opportunity — that is, if “exploitation” had some substantive economic meaning — the competition attracted would bid their wages up and keep them more fully employed than others. In fact, however, their marginal desirability to employers is indicated by their precarious and intermittent employment patterns, and by their generally higher rates of unemployment. In short, for workers as for business, knowledge transmitted by low prices (wages) is generally accurate knowledge, and forbidding its transmission costs both the economy and the intended beneficiary of such price fixing. Were the facts themselves to be changed — by improving the job qualifications of low paid workers, for example — the effects of that would be quite different from merely forbidding or distorting the transmission of knowledge of existing facts. In a purely informational sense, the employer still knows low productivity or high-risk categories of workers, but that only insures that the lack of effective knowledge transmission through prices (wages) will lead to less employment of them.

There is no inherent reason why low-skill or high-risk employees are any less employable than high-skill, low-risk employees. Someone who is five times as valuable to an employer is no more or less employable than someone else who is one-fifth as valuable, when the pay differences reflect their differences in benefits to the employer. This is more than a theoretical point. Historically, lower skill levels did not prevent black males from having labor force participation rates higher than that of white males for every U.S. Census from 1890 through 1930.¹⁰ Since then, the general growth of wage fixing arrangements — minimum wage laws, labor unions, civil service pay scales, etc. — has reversed that and made more and more blacks “unemployable,” despite their rising levels of education and skill, absolutely and relative to whites. In short, no one is employable or unemployable absolutely, but only relative to a given pay scale. Increasingly, blacks have been priced out of the market. This is particularly apparent among the least experienced blacks — that is, black teenagers, who have astronomical unemployment rates.

The alternative explanation of high black teenage unemployment by “racism” collides with two very hard facts: (1) black teenage unemployment in the 1940s and early 1950s was only a fraction of what it was in the 1960s and 1970s (and was no different from white teenage unemployment during the earlier period), despite the obvious fact that there was certainly no less racism in the earlier period, and (2) unemployment rates among blacks in their mid twenties drop sharply to a fraction of what it was in their teens, even though the workers have not changed color as they aged, but only become more experienced. The intentional explanation — “racism” — may be more moralistically satisfying, but the systemic explanation fits the facts. A decade of rapid inflation after the federal minimum wage law of 1938 virtually repealed the law as an economic factor by the late 1940s and early 1950s — before a series of amendments escalated the original minimum. During the late 1940s and early 1950s, when inflation and the exemption of many occupations from wage control made the minimum wage law relatively ineffective, black teenage employment was less than a third of what it was in the later period, after the minimum was raised to keep pace with inflation and the coverage of minimum wage laws extended to virtually the entire economy. To give some idea of the magnitude of this effect, black teenage unemployment in the recession year of 1949 was lower than it was to be in any of the most prosperous years of the 1960s or 1970s. Moreover, even in countries with all white labor forces, teenage unemployment has been similarly vulnerable to minimum wage laws.¹¹ This is in keeping with the lesser work experience of teenagers and therefore the greater distortion of knowledge involved when minimum wage laws misstate their value to the employer. Statistical data happen to be kept by age and race, but the more general point is that the negative effect of forcible distortion of knowledge hurts most those for whom the distortion is greatest.