Monday, March 25, 2013

The Minimum Wage Suppresses Wages

The minimum wage depresses wages.

This counterintuitive conclusion actually makes sense if you think through things using economic reasoning. One of the consequences of the minimum wage is to create unemployment, particularly among unskilled workers. This creates a pool of unemployed workers who are all competing with each other for the minimum wage, driving wages toward the minimum. Of course, these same workers often cannot get those jobs because of their lack of skills, and they cannot gain skills without a job -- a vicious circle they cannot get out of without spending their own money to go to school to get the credentials which act as a key to employment. Given that unemployed people likely do not have money for school, they have to get student loans, putting them in debt from the get-go. Any wages they may get will have loan payments subtracted from them. The net result may be a real income at or below the minimum wage.

A wage of $7.25 (the current minimum wage) gets you $1160 before taxes. The average student loan payment per month is about $250. One would have to make $8.80/hr to match the minimum wage with that loan payment. One would hope one would make much more than that -- but the point is that if people could gain skills through working, they could end up with the same wages and no debt to speak of.

In fact, without a minimum wage, unskilled workers could get hired at a rate that made it worth training them (which is not costless for the business), with the result that they would no longer be unskilled workers (even so-called dead-end jobs give you skills you need to hold down any job whatsoever, something many unskilled workers do not have, and quite frankly will not necessarily gain in school). As workers gained skills, they would bid up wages. Competition among businesses for workers drives up wages; competition among workers drives down wages. When you create a floor for wages, you create people who would rather work for little than for nothing at all. It is the same logic that results in mandatory insurance driving up insurance prices. Businesses competing with zero must have low prices; businesses competing with a wage of zero do not have to bid up wages. The minimum wage creates a zero wage that would not exist in a free market

So that is two ways in which the minimum wage suppresses wages -- directly and indirectly. And that leaves out the fact that it drives up the prices of goods and services (increase costs, and you increase prices) for everyone (including those you have made unemployed through your minimum wages) and protects big businesses from competition against upstarts -- especially those mom-and-pop stores the left love to wax romantic over.

So if you want to keep wages low, create a large pool of unemployed, keep large numbers of people unskilled, put a lot of people into debt, impoverish society as a whole, increase prices, and protect bug business from competition against small upstarts, then minimum wage laws are the laws you ought to support.
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