Government regulations use force to make us do what we might not otherwise do, supposedly for our own good. The irony of the minimum wage–like most government regulation–it that it causes more harm than good; and that the harm falls on those who can least afford it.
No one will disagree that a person ought to earn a “just wage.” The trouble is that government uses force to make employers pay a wage it deems “just,” an arbitrary figure arrived at by warring political factions. In reality, the minimum wage is neither a “just” wage nor a free market wage (one agreed to by both parties), except by occasional accident.
The first thing to notice about the minimum wage is that it applies only to those at the bottom of the pay ladder, unskilled, mostly younger people limited by their abilities or lack of experience.
Jeffrey Tucker tells how the minimum wage put his friend Tad out of work:
The minimum wage is nothing more than a barrier separating unskilled workers from a job. There is no requirement that employers hire low-skilled workers. What the minimum wage laws tell employers is they cannot hire anyone whose skill or ability prevents them from producing at the level of the minimum wage. For that person, the minimum wage is not a benefit; it is a door slammed in his face.
If his abilities enable him to produce $7 an hour, how can any employer afford to hire him at $8 an hour? The result is that these low-skilled workers cannot be hired even though they would benefit from the job.
Consider a small businessman who can buy a machine that can accomplish a task at a cost of $7 an hour or hire someone to do the job at a minimum wage of $8 an hour. If the machine and the worker can both do the job for $7, the employer may prefer to give the job to the worker, but he cannot because the government makes that a crime. He could pay the worker $8, but that would last only as long as it takes his competitor (who does buy the machine) to bankrupt him with lower prices.
The minimum wage is the reason some unskilled people will never find work. Just as clearly, if both employer and employee were free to agree on a wage, almost anyone could be employed, no matter how inexperienced, or how mentally or physically handicapped. Government, however, would rather give disability payments to the poor than see them working below whatever the minimum wage happens to be.
Some fear that the unskilled could be exploited without a minimum wage, but the harm in creating a permanent welfare class is far more damaging. John Paul II, in his encyclical Centesimus Annus, encouraged the fuller “participation” of needy people in the economy, “to acquire expertise, to enter the circle of exchange, and to develop their skills in order to make the best use of their capacities and resources.” For those on the lowest economic rung, the minimum wage prevents such participation.
It is curious that much of the pressure on politicians to increase the minimum wage comes not from the poor, but from the unions, whose members have no interest in working for minimum wage. They do have an interest, however, in preventing competition from workers further down the ladder. Larger corporations may also favor the minimum wage as a barrier against competition. Companies that are either better situated to absorb a minimum wage increase or that already pay their lowest-skilled workers more than the minimum wage are thus given an advantage over their smaller competitors.
Mandatory minimum wages are ineffective because they are price controls by another name. While the real beneficiaries of the minimum wage laws are people with skills and experience, many people are genuinely concerned that without a minimum wage, employers will be able to pay wages that are even below a free market wage.
Such an outcome could never exist for a significant time in a free market.
Simple math dictates that no merchant can pay employees more (or less) than those employees produce. Competition from similar businesses will quickly force the over-paying merchant to lower his wages or he will: a) lose his customers due to the higher prices he must charge; or b) lose his profits if he does not raise prices.
What will happen if the merchant is stingy and somehow manages to hire employees at $6 an hour when the market rate for unskilled labor is around $8 for similar work? Such a variance will quickly be resolved when the $6 employees learn they can earn more with a competitor across the street; or when the merchant across the street learns he can hire away as many employees as he needs from the stingy merchant at $6.50, or $7 or $8.
The stingy merchant will be able to hang on to his employees only if he pays $8 (the market wage). If he pays $6.50, the merchant further up the street will hire them away at $7, but only until the next merchant hires them away at $7.50, and so it goes. The market itself will correct inequities in pay rates—and unlike government—will do so without causing unemployment of the least productive and vocationally handicapped workers.
[excerpted from Chapter 6 of Free is Beautiful: Why Catholics should be libertarian]