top of page
  • Writer's pictureRohan Bhatia

Minimum Wage

The minimum wage has all but been universally appraised as a way for low-income earners to earn a ‘fairer’ wage. It’s seen as an obviously virtuous policy to ensure everyone can afford the ‘living wage’. Yet, it’s quite clear to see - statistically and theoretically - that a rising minimum wage hurts the people it tries to help: lower-income earners.


A minimum wage increases unemployment


In any basic Econ class, in High School or in College, one of the first things you are taught is that the labour market can be represented by the demand-side (the businesses looking for workers) and the supply-side (workers looking to supply their labour in return for a wage). Naturally, there is a point of equilibrium - where the demand for workers equals the supply for workers, and that is where a free market labour market should settle. Free market economists will tell you that it is at this point, and only this point, that efficiency in the labour market is achieved.


Yet a minimum wage acts as a price floor, distorting the price mechanism in the labour market and creating an excess supply of workers. This is because at the artificially set wage - above what would otherwise be paid to the worker - individuals offer more of their work to make more money, and firms demand less labour because it’s too expensive and hurts their profits. This of course is a situation of unemployment.


Of course, the workers who are likely to be offering this excess supply of labour will tend to be low-income and low-skilled workers. That is the very demographic that proponents of the Minimum wage want to help.


A minimum wage hurts businesses


Wages set by the free-market are, by that very definition, not arbitrary. The wage will be set on how much value a worker creates for the business.


Imagine a McDonald's worker who contributes $10 of value (sales) to the business every hour. The business will therefore look to pay that worker less than $10 - so that they can make at least some profit. So if they pay that worker $8 an hour, the business generates $2 of profit every hour. On the other hand, if McDonald's is forced to pay that worker $12 an hour - it makes no sense for the business at all. They'll be forced to lose $2 every hour. In that case, the business will either get rid of that worker (as mentioned above) or they'll be forced to bear the losses of the worker.


The minimum wage is intrinsically immoral


Imagine I asked you to pay $20 for a one piece of chewing gum. Obviously, you’d say no. In all likelihood, we’d negotiate it down to a price we both benefit from - something more like $0.50.


Now imagine I forced you to pay $20 for one piece of chewing gum. You're not allowed to negotiate this price with me, because the government has stipulated that it’s the minimum I am allowed to sell the gum for. So now you are forced, against your freedom and interests, to pay me $20 for the chewing gum. Or, of course, you could just reject to do any transaction with me and not have the chewing gum. Either way, you lose. You either substantially overpay for a piece of chewing gum, or you don’t get the gum at all.


This kind of government-enforced transaction is symptomatic of an almost socialist-style economic system and is a direct parallel to a worker trying to sell their labour to a business.


The minimum wage doesn’t work - because inflation exists


Okay, let’s assume that even though a minimum wage hurts the worker, it hurts businesses and it is immoral - we still go ahead with implementing one. Any economist worth their salt will tell you that a minimum wage never actually achieves the living wage. That’s because inflation exists.


When a business is forced to increase the cost of the wages they take on, they will naturally look to pass on this additional cost through higher prices for the products that they are selling. This creates inflation, which is the general rise in price levels across an economy. As you increase the minimum wage, the prices for rent, groceries and utilities will all start to rise. Higher wages create more demand for these products and naturally, their prices will be bid up by lower-income earners who have more money to spend. It’s therefore a chicken and the egg scenario. You increase minimum wages to achieve the living wage, but then the living wage rises so you must once again increase the minimum wage to keep up.


Conclusion


To sum up, a minimum wage is a naive policy tool that governments often use to attract lower-income voters. However, a close look at the effects of a minimum wage clearly demonstrates the negative consequences of such an anti-capitalist policy. It doesn’t achieve any of the outcomes it seeks to address. If we want to improve employment outcomes for lower-income earners, the government should invest in longer-term structural reforms to improve the productivity of the labour market and bolster the efficiency of domestic workers.

42 views0 comments

Recent Posts

See All

Comments


Post: Blog2_Post
bottom of page