One of the more pervasive economic myths is the need for a mandated minimum wage. This belief is the manifestation of an irrational fear. The fear is predicated on the notion that absent a minimum wage employers would pay the absolute lowest subsistence wage. For the sake of argument let us assume this is true. Were this true we would predict the following: (Given) employers strive to pay the least amount possible (Given) the minimum wage is the lowest legal wage, (Conclusion) employers would pay only minimum wage to the majority of the workforce. What do we find if we would look at actual wage data? As of 2006 a mere 2.2% of US workers actually make minimum wage. Therefore we can conclude this argument is irrational and without merit.

 

Would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?

 

Now the argument switches from an “evil employer” focus to a “safety net” focus. The safety net argument presumes ALL workers require sufficient pay to independently support themselves. Not all workers are the same however, nor do they all have the same goals. Many workers (e.g. teenagers) are inexperienced and do not need to work for self-sufficiency. Such workers would be happy to receive a starting wage in exchange for the opportunity to gain work experience while earning some spending money. By “happy” I mean they would prefer that versus no job at all. However “no job at all” is what most of them (and other low-skill workers) encounter because the minimum wage is higher than their productive capacity. With the recent increase in the minimum wage this is exactly what we got. As of 2011 unemployment for those 16-24 was over 50%. It doesn’t make sense to pay someone $7.25/hour for $4/hour work. The net result is that the unskilled and inexperienced never get the opportunity to get their foot in the door to gain the experience they need so they can demand a higher wage. Low starting wages are a stepping-stone to higher wages. Outlawing low wages is like outlawing the 1st grade in an attempt to eliminate illiteracy among 1st graders. Kids don’t stay in the 1st grade their whole life just as the same people aren’t making low wages their whole life.

The minimum wage overprices the unskilled out of the labor market (would you buy a Kia or a BMW if the government mandated the Kia could not be sold for less than a BMW?) thus it reduces the supply of available workers which then drives up wages for the skilled laborers as they are now not having to compete with low priced labor. This is why unions are ardent proponents of the minimum wage. It is not for altruistic “help the worker” sentiments, but rather because it benefits unions by restricting the pool of cheap labor that might otherwise compete with union labor. The best example of this union-government cronyism is the Davis-Bacon Act of 1931.

Perhaps the best argument against the minimum wage though is to accept the assumption that the minimum wage is a good idea. Let us imagine we raise the minimum wage to $40/hour. Surely that would eliminate poverty once and for all! But here’s what would happen – all industries employing workers making less than $40/hour would see their employment costs skyrocket. Those industries that have elastic pricing (e.g. fuel, food, utilities) would be able to pass the higher costs on thus decreasing the gains from the increased wage. Those industries that have inelastic pricing (e.g. discretionary leisure goods) would not be able to increase prices. They would go out of business. This would create unemployment due to the destruction of entire industries.

When the minimum wage is high these problems become apparent, but these same problems nevertheless exist at smaller scales. The irony is that the minimum wage is putatively sold as helping those most in need of government assistance, the unskilled worker, when in fact it actually harms those workers by preventing them from gaining employment. But I guess that’s why they invented welfare. Better to pay someone to do nothing than work for “too little.”