The case against minimum wage laws
As the government mandates an increase of the minimum wage across all age brackets, the economic reality is that minimum wage laws do more harm than good.
As the government mandates an increase of the minimum wage across all age brackets, the economic reality is that minimum wage laws do more harm than good (unless you run a big business or work in robotics).
The minimum wage is the government artificially increasing the cost of hiring an employee, which leads to the disruption of the market equilibrium in the supply and demand for labour.
The theory is that a higher minimum wage aids the low paid worker through helping them to escape poverty with this increase in income. However, the evidence shows that artificially raising the cost of labour does nothing but hurt the very people its supporters are trying to help.
It is clear that the section of society worst affected by minimum wage laws are the unskilled workers themselves. A simple examination of the laws of supply and demand can explain why.
An increase in the price of labour generates an increase in the quantity supplied, creating a surplus of labour. This is because a higher minimum wage will encourage more of the workforce to seek these wages. Now, there is more supply but for the same number of jobs, creating more competition for the most unskilled jobs which businesses will give to those with the most efficient and productive skillset. Also, businesses will demand less labour as labour has been made more expensive. This was seen when thousands were forced to work part time because of the Obamacare provision that a business with over 50 full-time employees must provide health insurance, which substantially raised the cost of taking on new employees. Therefore, artificially setting wages above the market equilibrium price for a low skilled worker can make it unprofitable to hire them and as a result, they will find themselves unemployed.
So instead of earning a higher wage, the low-skilled worker now earns no wage. Keeping the lowest skilled out of work and trapped in poverty was the minimum wage’s original purpose, and it worked. This was the case in the United States where white supremacists lobbied officials to raise the minimum wage so that the black population, already raised without an education and facing the Jim Crow laws, was cut off from that one chance at earning a decent income.
For example, the Mises Institute report that in 1967, the minimum wage in the US was increased to $1 for farmers which put 25,000 farm workers in the Mississippi Delta region out of work. Farming was a popular employment route for blacks as this industry was not yet subjected to racist minimum wage laws so allowed blacks to earn a modest living. It is no wonder that the economist Milton Friedman called minimum wage laws the most ‘anti-Negro law on our statute books.’ Even to this day, Labour Economics reports that an increase in the minimum wage would be particularly harmful to the black population.
Young people are another group that are severely affected by minimum wage laws. Due to being new to the workforce, they have little skills and nearly no experience to speak of therefore an entry level job, usually paying minimum wage, is the first rung on the job ladder, allowing young people to learn basic and vital job skills which makes them eligible to enter high-paying and skilled occupations. But increases to the minimum wage for young (unskilled) workers can deter employers from hiring young people and instead, as stated before, hire those with more experience (older workers) who provide greater productivity to businesses, as these two sets of workers are now at the same price.
This has devastating effects for young people. As more within a generation can’t fit themselves into the job market, more of this generation will live in poverty which causes social ills, such as crime and substance abuse, to become more prevalent.
Overly generous minimum wage laws have been blamed for causing high youth unemployment such as the case in France with the OECD reporting that the Youth Unemployment rate to be around 20%. It can be argued that the UK’s youth have been spared such a tragic fate at only 12%. If minimum wage laws were equalised across all ages, even more young people will find themselves out of work.
Another effect is that it becomes cheaper for many businesses to replace human labour with machinery.
Given how automation has many terrified for job prospects in the future, I recommend that those worried should not force employers to do this by artificially inflating wages. When implementing machinery to do a human’s work becomes cheaper than the actual human, businesses will simply turn to automation as a means of sustaining profit.
Whilst it is good news for tech workers, engineers and robot salesmen, it is devastating to those which minimum wage laws have rendered un-hireable. I highly recommend all of you to watch ReasonTV’s video ‘The $15 minimum wage is turning hard workers into black market lawbreakers’ (below). This shows the true human cost of minimum wage hikes as one businessman made his carwash near fully automated with some employees turning to clean cars on the black market due to automation and some businesses closing due to being unable to afford the new labour wage laws.
The destruction of small business is another devastating effect of the government mandating a higher minimum wage.
It is no wonder why very large companies, such as Walmart and now Amazon, are currently lobbying to increase the minimum wage in the United States. Large businesses know that they can take the costs of a higher minimum wage and in turn, kill off their small-business competitors.
Many small-run, family owned businesses fell into bankruptcy in California and New York when both states raised their minimum wage. As a result, the mega corporations have increased their share of the market as consumers have little alternatives. This further leads to the monopolisation of the market amongst the big firms.
No doubt in the future, there will be calls for the government to break up these big chains even though the government passed the very same laws (minimum wage increases) that created the monopolies in the first place. The key problem with these artificially created monopolies is the lack of competition leading to more inefficient services, poorer quality products and rising inflation. This will continue long into the future as start-up businesses can not break into the market as they have been bottlenecked by cruel minimum wage laws. Could you imagine if this was the case in the past? Ground breaking businesses such as Microsoft and Apple, which have improved all our lives, could not have formed.
In conclusion, minimum wage laws which artificially inflate the price of labour above market equilibrium prices backfires completely. The blatant disregard for the basic laws of economics and the supply and demand for labour creates policies which seriously harm not just the unskilled worker but the entrepreneur and the consumer as well (and that’s all of us).
Whilst minimum wage laws are altruistic in intent by seeking to help the poorest in society, its supporters are ignorant to its elitist effects which are that it traps the disadvantaged into unemployment and poverty whilst playing into the hands of wealthy big businessmen.
If you are truly concerned for those who are unable to afford the cost of living, you should focus on methods which reduce the cost of living such as lowering VAT, removing sin taxes (like the sugar tax) and preventing the reckless printing of money which only reduces the purchasing power of each pay check.
After all this, I hope I have shown you that more minimum wage laws are not the answer.
