Tuesday, February 24, 2009

Minimum wage laws are counterproductive

For several reasons:

1) A wage determines the value of work performed. This value cannot be changed by fiat because it depends on how much customers are willing to pay for it. If we assume that a certain type of labor only generates a profit of 4 dollars per hour, then an employer can only pay a wage of 4 dollars per hour at the maximum to avoid a loss. If the worker were in an entrepreneurial position, he couldn't charge more than 4 dollars per hour for his work either or else he wouldn't find willing customers. A law that prohibits him from earning less than 5 dollars per hour would not increase his income, but most likely cost his job.

2) There's no "positive upwards spiral" created by minimum wage laws. Some proponents argue that more revenue earned by underprivileged workers will cause more money to circulate in an economy and in the end, everyone is supposed to be better off. If that were possible, we shouldn't stop at 8 dollars per hour, but enact laws that allow everyone to earn a gazillion dollars per hour at the minimum. That may sound insane, but it's merely the logical conclusion of the "positive upwards spiral" argument.

In reality, a finite amount of money chases an equally finite amount of goods and services. Prices for these goods and services need to be set according to supply and demand or else calculational chaos (such as we've been witnessing in the Soviet Union) will ensue. A minimum wage of one million dollars would totally destroy the division of labor. A minimum wage of 8 dollars doesn't do as much damage, but has exactly the same effects on a smaller scale.

3) Empirical evidence indicating that minimum wages and increased employment correlate is negligible. Minimum wage laws are one factor in an economy that influences the demand for labor. If other factors outweigh the damage done by minimum wage laws, there can be increased employment despite of, not because of minimum wage laws. One should not confuse correlation with causation.

Thus, while minimum wage laws may, on first glance, seem like a good idea to protect unskilled workers from bad living conditions, in reality all they do is create barriers for the poor, disturb the division of labor and decrease overall wealth and opportunity.


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Sarah said...

It cannot succeed as a matter of fact, that's what I suppose.

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