Minimum Wage Laws Hurt the Poor by Preventing Employment

Empty factory

Image by Ryan Remillard on Flickr

Minimum wage laws are one of the best examples of the negative unintended consequences that often result from good-intention laws that end up hurting the very people they are meant to help. For those who lack the most basic understanding of economics, it may seem like common sense. If there are people who don’t make enough money, why not just pass a law requiring that they be paid more?

Labor as a good

The problem with this approach becomes obvious once we start thinking of labor as just another good that is sold on the market. When we work for an employer we are essentially selling that employer a service. Economic laws apply to this good just as well as they apply to goods like milk, meat, etc, and yet many would agree that there is no need for government intervention when it comes to the price of these other goods.

The more expensive a good becomes, the more the demand for that good decreases. If the government were to mandate that the price of chicken be raised, it would result in less chicken being purchased by consumers.

Who really cares about the poor?

Opponents of the minimum wage are often accused of not caring enough about the poor. It’s important to note though, that it is precisely the poor and unskilled that are negatively affected by the minimum wage, for they are essentially being told by the government that they are not allowed to sell their labor for less than a certain amount. Increasing the minimum price of labor has no effect on labor that is worth more to employers than that minimum.

When companies compete for consumers, they can compete on quality, convenience, price, etc. Making it illegal for an unskilled worker to compete in the job market based on price, puts that unskilled worker at a disadvantage, making it harder for him to get a job.

The higher the better, right?

Proponents of the minimum wage deny that it results in unemployment, but if they truly believe this, why then are they so timid when coming up with a minimum? Why not raise it to $50 per hour, or even higher? The higher the better, no?

Looking at it this way makes it easier to see the impact it would have on the very people that we’d be trying to help. It is obvious that setting the minimum price for labor at $50 per hour would result in most businesses being unable to hire as many workers to do jobs that to them are worth less than that. And if setting it to $50 per hour would cause unemployment, so would, albeit to a lesser extent, setting it to $15, or anything that is higher than what the market would set it to.

A business that has allocated $30 per hour to hire three workers for $10 per hour each, would only be able to hire two of those workers if forced to pay no less than $15 per hour.  It is naive to think that a business will simply go on as usual, hiring the same number of workers, even when those workers start costing more. Businesses respond to price changes just as well as consumers do when purchasing their goods and services.

More competition for the poor

Here is something you may not have thought about. The minimum wage also forces low-skill workers to compete with high-skill workers. As economist George Reisman points out,

…a low wage constitutes a competitive advantage for less-skilled workers that serves to protect them from competition from more-skilled workers. In other words, a wage of $7.25 per hour for fast-food workers serves to protect those workers from competition from workers able to earn $8 to $15 per hour in other lines of work. The workers able to earn these higher wage rates are not interested in seeking employment at the lower wage rates of the fast-food workers.

But if the wage of the fast-food workers, and all other workers presently earning less than $15 per hour, is raised to $15 per hour, then these more capable workers can now earn as much as fast-food workers as they can in any of the occupations in which they had been working up to now.

The unemployed clerks, telemarketers, factory workers, and whoever, who otherwise would have earned between $8 and $15 per hour, will have no reason not to apply for work in fast food, which will now pay as much as any other occupation that is open to them. And since those workers are more capable, it is overwhelmingly likely that to the extent that they do seek employment as fast-food workers, they will be preferred over the low-skilled workers who presently work in fast-food establishments

If I were a demagogue I would ask democrats, why they hate the poor so much that they would do this to them.

So what is the solution?

Should we really just allow employers to pay whatever they want? The truth is employers do not pay whatever they want. If they did, no one would be making more than the required minimum. No company wants to pay $100,000 a year to anyone. But they must, for jobs that are worth it, lest they lose employees to their competitors.

Without minimum wage laws, the price of low-skill labor would be determined by the market just like for any other good. To strengthen their case, those calling for the raising of the minimum wage have the benefit of being able to specifically point to the workers who would immediately receive a raise. For us who are opposed, it is much harder to remind those ignorant of economics, of the jobs that will not be made available in the future as a result.

The poor and unskilled would benefit greatly from the lifting of this restriction. A job, even a low-paying one, allows them to gain the basic skills necessary to move on to better jobs afterwards. The poor don’t have to stay poor, and we can help by making it easier for them to rise out of poverty. But this isn’t accomplished by raising the minimum wage, which raises the wage for some while reducing it to $0 per hour, for others.

I created the following video a while ago to illustrate how silly minimum wage laws are and how they affect those who need jobs the most:

http://www.youtube.com/watch?v=AbuJYhX3prc

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  • I recently wrote an article about how an increase in the minimum wage rate increases unemployment. You can read it here: http://wp.me/p3N9zD-4e

    • Thanks for stopping by Robert. That is a great article that you wrote! You cover many aspects that I didn’t stress as much in my article. That’s what’s so great about reading about these issues from different people’s perspectives.