Thursday, May 21, 2009

Unemployment and the Price of Apples


Imagine for a moment you are the owner of a small apple orchard. It isn't your main occupation but you make a little extra money at it to pay for some things around the old homestead. In years past you've simply sold your apples on the side of the road in front of your place but that has always been a little troublesome, particularly when the weather was disagreeable. You've heard of a new "Farmers' Market" that you want to try. They have a paved lot that keeps you out of the mud when it rains, the stands are already built with electrical outlets, and there are clean restrooms on site.

The owner/manager of the market charges you based on a percentage of your total sales; if you don't sell anything, you don't have to pay anything. But there is one catch. You have to sell your apples at a certain minimum price. You can sell them for higher than that price but at no time can you sell them for less. Since the price is greater that anything you ever gotten for your apples before you are quite agreeable to these terms and set up your shop.

Now there are plenty of folks walking around the market and looking but no one seems to want to buy your apples. When an older couple walks up, you ask them how many pounds would they like you to bag up for them. They mention they would like to buy two pounds but ask if you can come down on the price. You explain the rule about the price and they say they will just have to wait till the price comes down.

You continue to sit out in the warm Autumn sun and you notice that some of your apples are beginning to spoil. Then you see two guys in a pick-up truck parked just outside the fence of the market with a sign that says they are selling apples at a price half that of what you must charge and there is the old couple buying from these guys what appears to be four pounds. You complain to the owner about these guys and he calls the police who forces them to move their truck or be arrested for some parking violation. And you continue to sit. And your apples continue to spoil.

There is women who has a stand across the aisle from you who sells apple pies and other fruit-flavored baked goods. Thinking you might be able to make a quick deal, you approach her to see if she wants to buy any of your apples. She says she buys her apples at another orchard on the other side of town because they are a lot less expensive than yours. You mention to her that she has to drive a long distance to get there and you are closer but she responds that even with the transportation costs, she saves money by buying from the other orchard. She explains that if she had to buy apples at your price, she would have to raise the price on her apple pies and then she would lose customers. So you return to your stand and have a seat. And your apples continue to spoil.

When man defies the Law of Gravity there can be significant penalties if he makes a mistake. The Economic Law of the Market Price is as immutable as the Law of Gravity and carries the same inherent risks when man begins to interfere with it. Though the price for any individual item is determined solely between the buyer and the seller as they both determine what is beneficial for each of them and only for that exact moment of time when they reach a decision, the general rules of Supply and Demand help influence the Market Price over a longer period for a whole commodity that is placed on the open market. This is basic Economics for anyone who has been through high school but the basics always bear repeating so that everyone is on the same sheet of music.

When Demand is high and the Supply of a marketable good is what might be considered normal, the price will invariably go up. When the Supply is high and Demand is normal, or dropping, the Market Price will go down. When there is a Price Floor at which a good cannot be sold beneath, if it is below the Market Price then it does not have any influence and becomes an ineffectual curiosity. If it is above the Market Price, as in our example, it becomes a hindrance to buyers wanting to make a purchase and leaves sellers with an unsold surplus. When the commodity is apples, this means rotting fruit sitting in the baskets. When the commodity is labor, this means Unemployment.

The Federal government of these United States has a Minimum Wage law that many politicians say is meant to help workers just starting their employment history to obtain a "living wage." The problem is that, like many marketable goods, workers come in different grades. We expect to pay more for premium than we do for regular gasoline and we expect to pay more for a brain surgeon than we do for the teenager we hire to mow our lawn. When the Minimum Wage is set at a level that is equal to the Market Price for an elevated grade of workers, those workers at lower grade levels due to a lack of education, training, or experience are not hired. In this fashion, the Minimum Wage law begins to punish those it is purported to help.

Those workers who are lucky enough to have a job and receive a wage increase because of an increase in the U.S. Minimum Wage may have a moment of euphoria when they seem to be getting ahead but after an expected lag, since the costs of production, transportation, distribution, and merchandising of all goods has been raised across the board, the cost of living will eventually match the increase in pay so everyone is back where they started. The Minimum Wage Law is also a factor in inducing those who want to sell their labor to immigrate to this country, illegally if necessary, so they can make more here than they did in their homeland, even if they accept less than the "legal" minimum. It also contributes to driving those who purchase labor to look outside the U.S. for a better price so that they can keep their costs of production down so as to keep their American customers who demand low prices (Always) satisfied.

Politicians can always gather more votes by promising to hold a gun to employers' heads to force them to pay people more than they might be worth to the individual employer and since taxes are based on a percentage of wages, the more one earns the more one pays which always give politician more money to spend on their pet projects. Also having masses of the chronically unemployed leaves a large pool for the government to recruit from to find persons who will "volunteer" to serve the government in a military capacity.

Now for the bad news/good news scenario. The Republicans promise to consider raising the Minimum Wage but not as high as the Democrats. The worse news is that the Democrats promise to raise the Minimum Wage. The worst news is that the Minimum Wage is going to be raised when our country needs for it to quietly go away the most. In the future, people will begin to accept wages under the table and well below the minimum just so they can earn an honest living. The good news about that is when one works off the books, one doesn't have to pay any Income Tax.

So the next time that one of your Liberal Progressive or Compassionate Neoconservative friends tells you that the Minimum Wage helps the poor, look them straight in the eye and tell them you think they need more fiber in their diet and apples are a good source of fiber...

* For further reading, I would like to recommend Human Action: A Treatise on Economics by Ludwig von Mises or for something a little lighter, Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics by Henry Hazlitt.

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