One problem with the minimum wage.

My brain has hurt too much over the last several days to compose much more than a paragraph or two about some minimum wage stuff I was discussing with Dr. Hmnahmna. But here’s this:

There are a few problems with the minimum wage that don’t disappear no matter how high or low you set it. Actually, if you set it at zero, at least some of these problems will disappear, I suppose, but anyways, here’s one:

The minimum wage restricts job opportunities.

Wherever you set the minimum wage, you essentially ban every job that pays less. By fiat. Not because anybody found a more efficient way to get the job done (e.g., a technological advancement reduces the need for labor), but because the law says so. That’s inefficient, which is a cold way of saying it’s bad for the economy, so let me humanize the problem a bit more.

The minimum wage is bad for those workers who would benefit from building up their skills and résumé by working in jobs that pay less than minimum wage. Envision what would happen to most fast food jobs if the minimum wage were raised to, say, $20 an hour. Those jobs would probably disappear, likely replaced by machines or by much higher-skilled workers that we wouldn’t think of as normal fast food workers. And a wide range of opportunities to build up basic job skills would also disappear.

Now, nobody’s actually suggesting raising the minimum wage from its current level to $20 an hour– it’s too obvious that severe unemployment would result. But is it unreasonable to assume that the minimum wage has already had an effect similar to that described above? Is it unreasonable to assume that raising the minimum wage from $7.25 to the proposed $10.10 (almost a 40% increase) would similarly restrict jobs?

People are better off with more opportunities to work than they are with fewer opportunities to work. The minimum wage reduces those opportunities.

One might respond that, yes, the minimum wage puts some people out of work, but you can give those people welfare. Well, yes, you can, but you can give them welfare even if they have jobs, right? Wouldn’t they be better off with jobs so they can build up some skills and contacts and know-how? The two aren’t mutually exclusive– it’s not jobs or welfare. So why not eliminate the minimum wage, let workers get what jobs they can, and get what skills and experience and contacts they can? Wouldn’t taxpayers rather foot a smaller welfare bill for somebody already earning $5 an hour than a larger welfare bill for somebody who had no job at all?

It seems to me that when you’re climbing a ladder, it’s easier to get to the second rung from the first rung than it is from the ground. (Spare me the semantics and pedantry about removing the first rung, which would make the second rung the first rung.) In the same vein, it’s easier to climb to $10 an hour from a lower paying job than it is from joblessness.

Hopefully this makes sense. My head’s been hurting enough that I was just chatting with Dr. Hmnahmna about trephination.

12 comments

  1. All excellent points. I believe it was Milton Friedman who said that the minimum wage law was one of the most discriminatory laws in existence. It barred those with the least skill and education. It benefits a some while negatively impacting others. But, as Bastiat so well emphasized, one effect is seen, and one effect is not seen. We always see the news talk about unemployment rates, but rarely, if ever, do we hear about changes in the hire rate.

    I did some research on this back in college and found that increases to the minimum wage did in fact decrease the hire rate among individuals less skilled, e.g. those with a highschool degree or less.

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  2. In further consideration of instead paying welfare to those already employed: it’s not only better off for the individual, but society as a whole is better off. Consider the examples below.

    World 1, No Minimum Wage in Effect:
    Inhabitants = 3
    Hired Workers = 3
    Wigits Produced = 5, 4, 3 (12 wigits)
    Salary = $5, $4, $3 ($12)
    Welfare = $0, $1, $2 ($3)
    Result: Society contains 12 wigits and $15

    World 2, Minimum Wage in Effect:
    Inhabitants = 3
    Minimum Wage = $4
    Hired Workers = 2
    Wigits Produced = 5, 4, 0 (9 wigits)
    Salary = $5, $4, $0 ($9)
    Welfare = $0, $1, $5 ($6)
    Result: Society contains 9 wigits and $15

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  3. Thus, job growth and wellness has little to do with the minimum wage. Increasing it wouldn’t be disastrous, but it also wouldn’t magically solve anything either.

    I wonder how much of an impact having powerful members of the legislative and executive branches had on the economic growth in Texas.

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    1. “Thus, job growth and wellness has little to do with the minimum wage.”

      If this is the case, then what’s the economic value of having a minimum wage?

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  4. “The stock market crash did not cause the Great Depression, but it did reveal major structural flaws in the economy and in governmental policies. Too many businesses had maintained high retail prices and taken large profits while holding down wage increases. As a result, about a third of personal income went to only the top 5 percent of the population. By plowing most profits back into expansion rather than wage increases, the business sector brought on a growing imbalance between rising industrial productivity and declining consumer purchasing power. As consumer spending declined, the rate of investment in new factories and businesses also plummeted.”

    Tindal & Shi. America: A Narrative History.

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    1. I’m not sure why you posted this here. Was it to pose a question, or to make a point? I’m asking seriously, because it affects my response, but I will say for now that a minimum wage would not have avoided the problem described above.

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      1. A little of both. I know that the depression was a result of several factors compounding on one another until there was finally an enormous economic collapse, but that doesn’t necessarily invalidate current issues in the economy that are grounded in this exact sort of disparity, no?

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        1. Not necessarily. However, if income inequality in the 1920s did not cause (or contribute to) the Depression, then one can’t make the claim that income equality is worrisome because it caused (or helped cause) the Depression. Income inequality is very low on my list of causes of the Great Depression, partly because the most common statistical indicators of inequality decreased as the Depression got worse, and partly because we’ve seen periods of tremendous economic growth in spite of (apparent) rising income inequality.

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