Everybody knows that the minimum wage is a good policy, right? Problem is, they’re all wrong. Economists proved long ago that price controls can’t work—they only create shortages and surpluses. The minimum wage is a price floor: if it is set above the market wage it will create a surplus, leaving some workers unable to sell their labor. The overall popularity of a minimum wage is perhaps the best example of ecognorance, and it can only be corrected through economic education. Some simple reasoning will go a long way towards clearing up the minimum wage confusion.
Consider the following thought experiment: suppose that the minimum wage is raised to $1000/hour. What are the implications? Evidently, most employers can’t pay that much and they’ll go out of business. If that weren’t so, we could all become fantastically wealthy just by decreeing a ridiculously high minimum wage. Now suppose that the minimum wage is lowered to $0.01/hour. Again, employers won’t pay that wage (even though they’d like to) because other firms are bidding for the same workers, and this drives wages up. The reason employers don’t pay the decreed wages is that wages are determined by supply and demand, not government edict. Firms hire workers with the goal of earning profits, while wages are costs. They competitively bid wages up to the point where the wage (cost) equals the benefit or extra profit gained from hiring that worker. So competition for profits practically ensures that workers get paid according to their productivity, according to the value of their labor. (In economics jargon, they get paid their discounted marginal revenue product.)
Now let’s trace out the effects of an increase in the minimum wage on the employers affected (e.g., those hiring unskilled labor). First, the increased labor costs lead some firms to lay off workers and others to shut down, since demand for their goods and hence their prices have not changed. But the downsizing and shutdowns reduce the supply of the goods, increasing their price. This new, higher price justifies the higher wage for those who kept their jobs, since they are now producing a more valuable product. The end result is that some workers lose their jobs, while the rest enjoy the higher wage. Consumers lose because prices are now higher.
Since workers are paid according to their productivity (like all factors of production), all the minimum wage does is to make it illegal to buy or sell labor beneath the price floor. The government is essentially saying: “You must be this productive to legally work in our country.” This is most harmful to the least skilled of workers, the ones we want to help most. They will be the first to be fired, and will be cut off from the chance to gain the work experience and job skills needed to earn a legal wage. Allowing such people to work for lower than minimum wages gives them a chance to work their way to a better life. To deny them the freedom to negotiate their own wages and to leave them legally prohibited from working is a moral outrage.
Some clever economists might argue that the minimum wage can increase the total wages paid to all workers. This could happen if the amount of workers unemployed was more than offset by the increased wage. But what is this except human sacrifice?! They would knowingly unemploy the most needy in order to increase the aggregate income of workers. This position is morally bankrupt and an insult to those who genuinely want to help the less fortunate.
In sum, the minimum wage harms the very people it intends to help. It’s a moral outrage that ought to be instantly abolished. Freedom is the best policy to help the poor.
Recommended learning:
- Gene Callahan’s excellent analogy, in which he compares the minimum wage with a hypothetical “minimum stock price”. Find it in his book, Economics for Real People (free online), pages 189-194.
- Roger Garrison’s Mises University lecture. You can follow along by downloading his powerpoint.
- Mary Ruwart, Healing Our World (free online). A great book for leftists, Ruwart shows how government restrictions hurt the poorest to the benefit of the wealthy and politically connected.
More nonsense of the Austrian school capitalist utopia. And no, I'm not a socialist. People who right articles like these assume that trading a larger tyrant, the federal government, with potential smaller ones like business owners is the solution. The fallacy lies in that the worker has a choice. The "buying or selling labor" smacks of this travesty. Isn't just another deregulated & sophisticated form of slavery? The fundamental flaw is that human behavior, and the individual, are divided neatly in dollars & cents. The irony is that this "neatness" of the markets are the very same philosophy they are against, demonstrated by the often used cliche "let the organic market work itself out." This implies that an Adam smith faith-based initiative is all that is needed. Unfortunately, they have worked themselves out, and is precisely what you have today with globalization, the fed, etc. Modern capitalism is no different than governments. They both lack equilibrium and, if given the opportunity, seek to expand in a world of seemingly limitless resources. Humans are just another resource to exploit. There is obviously more to it. But, I do not have the time nor space to write.
A resource based economy will use what resources we have on this planet. Everyone would be taken care of- food, shelter and necessity to survive. Corporations today generate most of our toxic waste. If we do not incorporate this type of economy in the near future, then expects serious problems down the road.
I agree that a resource based economy is the way to go. Anyone who has not heard of The Venus Project should look it up. State capitalism is inherently hierarchal and will always lead to the exploitation of workers and the environment.
The writer didn't say anything about Utopia. Just what do you mean by "they have worked themselves out, and is precisely what you have today…"? The free market and the government are different in a very important way: If a businessman offers you something, you can accept his price, bargain for it or refuse it. If the government "offers" you something, you take it whether you like it or not and if you refuse "the man come and take you away" (or worse). Co-operation works to improve our lives. Notice I didn't say it would create a Utopia. Coercion tends to make our lives worse.
Understood. But what you have stated is still in the paradigm of the libertarian utopia. You are assuming that there is a difference between government and business today. They have been merged into the fascist state. The mythical markets "have worked themselves out" to the end result of monopolistic policies & actions.
If you're not a socialist, then you're strongly anti-market. I think you're misunderstanding what 'free market' actually means. It's a common mistake to conflate actually existing capitalism with free markets. Libertarians definitely do not want actually existing capitalism, which is a mess of privilege and exploitation.
[...] Wiebe has one of the best explanations I’ve ever read: Since workers are paid according to their productivity (like all factors of [...]
Total Scatter and Muddled thinking, Having gone through the Thatcher/Raygun recession of the 80's I can tell you there aint no limit to how Low employers will attempt to drive down wages.
Without a floor under wages, all you will end up with is a goodly section of the community working to cover their basic expenses, and not able to contribute to any recovery, more likely they'll be helping things get worse by defaulting on debt ? You'd end up with a workforce composed mainly of Hillbillys, who held their heads high, whilst heading for an early grave.
See thats the trouble with Libertarianism, it takes no account of the depths to which Man is willing to exploit his fellows.
I addressed this with the hypothetical 1 cent minimum wage. Your argument, taken to its logical conclusion would mean that without a price floor, all wages would fall to near zero, including doctors, engineers, CEOs, etc. But this is non-sense. Before the minimum wage was instituted, competing businesses bid up wages because labor is scarce and profitable to employ. You could have at least tried to criticize the logic of my argument.
The skilled labor you mentioned is no longer a large sector of the "potential" work force today. I would take away CEOs as they produce nothing. Furthermore, In the period of time you are discussing, highly skilled labors were a product of privilege. They had the means to afford the education needed and the social connections to grow in those fields. The rest of the population remained, in one flavor or another, manual laborers with low level skills. America will probably return to that system in a more, and perhaps, egalitarian manner for the "laborers."
What is conveniently ignored with the minimum wage is that it assumes that there will not be a race to the bottom. Modern history has show, through globalization, the opposite. The minimum wage also established the minimum a person is worth to an industrialized society. Given civilization's track record, the brightest, most hard working do not necessarily "make it to the top" or earn their freedom. This is true for the most part now.
You're still making the errors I pointed out in the article. You have to first prove that the minimum wage works. I argued that it unemploys people rather than increasing their wages.
If you want to learn about economics, I highly recommend the book 'Economics for Real People'.
"See thats the trouble with Libertarianism, it takes no account of the depths to which Man is willing to exploit his fellows."
Yeah, that's why it makes so much sense to give a bunch of Men the power of life and death over the community and call it Government. Because all THOSE guys are angels in human form!
Not.
which eventually leads to corruption
[...] is violent theft by the State. Wages are a private contract between two people or a person and a company. You cannot on the one hand, call for Natural Rights, and then in the same breath, call for the [...]
[...] is violent theft by the State. Wages are a private contract between two people or a person and a company. You cannot on the one hand, call for Natural Rights, and then in the same breath, call for the [...]