The increase in federal minimum wage has sparked debate on whether the move has come at a poor time, given slowing economic conditions. What these discussions don’t consider are the universal adverse effects a minimum wage regime has on the economy and on the workers it is meant to help.
At the heart of minimum wage laws lies a restriction of freedom. The law asserts two sovereign individuals are prohibited from contractually agreeing to exchange money for labor at a rate below a given price. Defenders of personal liberty somehow overlook this observation. If an individual has a right to control his or her body and should be free to determine his or her path in life, why are certain jobs that pay a given wage outlawed?
Lowering the price of one’s own service can be a critical tool employees can use to their benefit. Thousands of scenarios can be imagined in which an individual, either because of personal handicap, educational limitation or a willingness to live a very simple lifestyle, would find it advantageous to lower his or her cost of labor to compete with more qualified individuals.
Beyond the restriction of freedom, minimum wage laws decrease the cost of marketplace discrimination. In a free market, economic disadvantages are levered against firms that pick employees not based on productive capacity. If the race of the employees trumps the ability of those employees to do a job well, the firm invites competition from a non-racist firm, which can produce the same output more efficiently.
Christopher Westley, a professor of economics at Jacksonville State University, said in his article "Diversity, Yes; Force, No," if a company paid one race more than another, the firm would face losing its workforce to another company that could bid them away. In the long run, the economic punishments for racism would severely hamper a profit-maximizing firm.
But a governmental minimum wage law changes things. Westley points out that as minimum wage laws exceed the marginal productive value of the worker in many low-skill positions, discrimination no longer has disadvantages to businesses. The firm is required to pay a worker more than his or her services are worth; they are allowed to be racist without incurring market penalties.
The typical argument for a compulsory minimum wage is a family cannot live with some given hourly wage. But minimum wage does not create wealth or make the firms or workers more productive. If the minimum wage exceeds the value of work being done, the firms are forced to engage in acts of charity, paying the worker for more than the labor is worth. Firms that cannot engage in charity are forced to lay off workers. More labor transactions are forced into the underground economy, free from government intervention.
What if the minimum wage was increased to $200 an hour? Surely this would help workers with financial security. But it would be extremely difficult to find a job. Unemployment would be widespread, as the cost would surpass the value of labor. It follows that any step toward extreme minimum wage would have a degree of unemployment associated with it.
It is nearly impossible to know which sectors will be affected by a minimum wage hike. An increase in unemployment in one sector can change labor market conditions in others. This would normally put downward pressure on wages for jobs paying just more than minimum wage or unregulated labor markets, such as day laborers.
We all want everyone to have a good job, enough food and financial security, but if we do not understand economics, the study of unintended consequences, as Henry Hazlet explains in Economics in One Lesson, our attempts to help through government force and manipulation can easily cause more harm than good.
Gilson, a business sophomore, can be reached via [email protected]
