L.A. Liberty

Minimum Wage, a Synopsis

After receiving a few messages today regarding the minimum wage, I thought it worthwhile to offer a brief summary of the argument. (For a bit more detail, please see my post Repeal the Minimum Wage.)

The premise can be understood in one sentence: you set a price floor for anything, you create a surplus of supply.

When it’s a price floor on hirable labor (aka a minimum wage) - you get a surplus of hirable labor (aka unemployment).

It’s fairly basic economics: as the artificially dictated price increases above the market clearing price, the overall quantity demanded by consumers decreases (and thus supply remains unsold).

Lower-skilled workers in particular become un-hireable when their productivity in a given job is less than the wage an employer must pay. If a person can only contribute $5 an hour in productivity, any wage above $5 (plus overhead, insurance, taxes, and whatever profit that makes the employee worth hiring in the first place) would make the hire a net negative, or loss, to the employer. And no business can be competitive, much less sustainable, by carrying losses.

This glut of hirable labor as a result of a price floor in wages, in turn and counter to intentions, grants more power to the employers who now have more candidates for every job opening. Instead of these mostly entry-level candidates being able to negotiate their foot in the door, the employer may be able to use extraneous criteria that may have previously been unnecessary or immaterial (extended referrals, higher education completed, greater experience, church attendance, shared interests, ethnicity, etc.) to decide who to hire.

Employers often also increase prices of their products to compensate for their greater expenses, and thus pass off the costs to consumers (and we’re all consumers).

In the long run, the effects are further compounded as employers invest in ways to stay competitive by using machinery to automate tasks previously performed by workers. And once that investment has been made and the new efficiency has been created, it is unlikely to be reversed. Another long-term effect is that employers lose flexibility in offering non-wage benefits. To be able to afford the new wages: compromises may be made with regards to working conditions, vacation days may be decreased, or a workplace that was once more casual may make stricter and less comfortable demands in order to increase the productivity of the workers commensurate to their increase in pay.

So not only does a minimum wage price some workers out of the market altogether, it also incentivizes employers to find ways to use existing labor less and in a less favorable manner. This is what Bastiat called “that which is not seen.”

It is utter common sense: making something more expensive tends to force people to use less of it (by eliminating it altogether, finding ways to do more with less, or simply turning to alternatives, including black market options). Statists seem to understand this principle with regards to things like sin taxes, gasoline taxes, or penalties for overwatering a lawn - but unfortunately they fail to make the connection when it is the price of labor that is increased.

Posted May 26, 2012 at 11:06pm in ∆ minimum wage economics politics | comments || home