Repeal The Minimum Wage

In July, the federal minimum wage rose from $6.55 per hour to $7.25 per hour. Before it went into effect, the Shelby County Commission in Tennessee passed an ordinance requiring firms that contract with the county to pay a “living wage.” Similar ordinances are in place around the country.

But these laws actually eliminate opportunities for low-skill workers and waste resources. They also couldn’t have come at a worse time: The last thing people on the margins of the labor market need are laws that will make them more difficult to employ. With unemployment hovering near 10%, perhaps now is a good time to consider repealing the minimum wage.

[…]

The market process reveals the marginal value of a given hour of labor, but supporters of minimum wages assume that the impersonal market process is somehow capable of committing injustices. This is a line of thinking that is centuries out of date. In Medieval times, markets were hampered by the “just price” doctrine, which basically held that, in any transaction, there was a morally correct price and other prices that were morally incorrect. There was no compelling theory for why some prices were morally correct and some were not; further, there was nothing to ensure that the mechanism by which these prices were determined was legitimate. In the same way, can we reasonably expect to identify those who are blessed with sufficient moral insight as to be able to determine which wages are “just” and which wages are “unjust”?

Unfortunately, this is a point that has to be made over and over again. No matter how they are packaged, restrictions on how labor markets operate ultimately destroy wealth and hurt poor workers. If Neumark’s estimate is accurate, then as a result of a minimum wage increase, about 300,000 people will be denied the opportunity to acquire the skills they need to succeed later in life.

“Repeal The Minimum Wage”, by Art Carden on forbes.com

 

I used to believe that minimum wage laws were a good thing for society. Whenever I would hear the minimum was raised, I would have a fuzzy feeling that this was a positive step. But, after some reading and reflection, I reached a different position: the popular rationale offered by the media and politicians are wrong. By looking at the complete picture and in particular the point of view of the different actors involved, it became clear that such laws actually cause harm.

The point of view of the employer is quite revealing in this instance: you currently hire a group of people, of various skills and productivity. You can only hire someone if their cost of their labor is lower than the benefits their labor provides in terms of revenue. You now face a problem when the minimum wage is forced or raised on your company if you currently employ some people below the minimum. After the mandated raise, the cost/benefit of some employees, the least valuable ones, may no longer make sense and you can no longer afford to hire them. In that case, the law caused harm by preventing the voluntary exchange of two goods, labor and money, which means that both participants are now worse off.

The same thing happens if a minimum price was set for any kind of good. In the market for second hand cars, a minimum price would forbid the exchange of some cars (worth less than the minimum) at the agreeable price to both parties, and some of the least valuable cars would remain “unemployed”.

 

Art Carden provides a good summary of the issues with minimum wage laws: they hurt low-skill workers, create more unemployment and prevent exchanges (labor against money) that would be beneficial. He also points to detailled evidence reinforcing the conclusion.

In addition, because both participants want the exchange to happen at the lower price (rather than not happen), I also think the minimum wage law encourages a black market (even though it comes with various increased risks).

The arguments in favor of minimum wage laws stem from a misunderstanding of competitive market process: for a given level of skill or productivity, the value of an hour of labor tends towards the value it produces, within a window of uncertainty and negotiation. It is an humbling realization, but we actually cannot conceive a system that would be more just or fair.

 

PS: Art Carden also has a good piece on Wal-Mart. He notes that Wal-Mart lobbies for minimum wage increases, effectively restricting its potential competition.

Advertisements

Tags:

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: