On Miniumum Wages

My friend here started an interesting discussion on the minimum wage law, the Mises Blog has this excellent post on the history of the minimum wage– both discuss important aspects of the law and its implications. My thoughts on it follow. Minimum wages have been the Socialist/Communist anthem for a long time, however, simple economic reasoning will tell you that instead of achieving a standard wage, what the law actually does is to increase unemployment by leaps and bounds. So, if there is one thing that is anti the ‘worker’ it is the minimum wage law. How so?
For starters we know that a minimum wage law is not uniformly implemented across the nation, which means some states accept it and others don’t. So, if the aim is to make gainful progress towards rural employment and to move away from migration to urban centers, this is horrible. A minimum wage law means, everyone wanting employment will rush to the city hub- to those industries that the minimum wage law applies to in particular.
Assuming that the minimum wage law is out to help the poor, this would mean that people can work only so many hours. Lesser hours, less payment and no over-time! Say bye bye to entry level jobs as well. This stuff is obvious. What is not obvious is what else will happen. Institutions will strive to pay people ONLY the minimum wage, after all payable wages are still set by the firm in question. So what? Illegal employment will multiply and the economy will slowly sink…. Not to mention, that you will have more regulated business costing that much more to maintain, run and even set-up which is the greatest disincentives to a would-be entrepreneur.
In fact, minimum wage or “fair wage” as it is ironically called is anything but fair. It violates the most basic principle of trade, which is that when two people voluntarily agree to trade, both gain. If, I agree for example, to take your dog for a walk everyday for an hour for you (you dislike doing this) for ten rupees a day, then we both stand to gain. I earn ten rupees an hour and you get to spend the time you would otherwise spend walking your dog, doing something else you like instead–like munching a burger or whispering sweet nothings into your sweetheart’s ears.
Obviously I think the ten rupees is a great idea and it is the highest price I would get paid having enquired else where for a higher price, and I think walking your dog is not such a bad thing if I get ten rupees. I might for instance wish to be paid a hundred rupees, but you think you would rather walk your dog yourself in that case. Given that I cannot coerce you into paying me a hundred and you cannot coerce me into doing it for less than ten rupees (by law!), we now have what I call a contract.
Minimum wage actually tells us, that you and I cannot decide to do this for the price we want. It suggests that you must pay me a minimum of five rupees. Great for you! However, imagine- poor me. Why would you offer me ten when law says that you can get away with paying me just five? There is of course a greater tragedy involved here. That is that minimum wage is violating both your right and mine to decide our own terms of trade. Whatever happened to civil liberties?
None of this is new though. In fact it dates back to the oldest principle of market economy, which goes as follows: Given the willingness of bosses to hire employees and the willingness of employees to work, wages and prices naturally settle at a point of equilibrium. This point of equilibrium as it were (as in the example above) usually is around a price that is agreeable to both parties. Of course like every process this does not work perfectly. However, like all processes it works best without regulation. Why? Because when “fair wages” are enabled, the minimum wage is never anywhere near what a market price or wage could be. Horrible eh?
How would you run a business? I would for example, despite being very noble want to make a profit if I am providing a service to society, no matter how small that profit might be. It is actually rather simple, if my production costs are more than what I recover from my sales my business will go bust and there goes my bread and butter. So now in a situation where there is a minimum wage law in place, what can I do? A minimum wage law essentially forces me to pay more than I can recover. What do I do? Instead of hiring an M.A. English Hons for my publishing house I hire a B.A. 40%– Ms. Forty percent will work for my publishing house at half the price, because she knows that with her qualifications what I am offering her is a competitive salary. Among other things, my books will have more errors and poor quality. People will notice and buy less– either I will make losses or I will shut down.
Such is the effect of a minimum wage law. It hurts both the boss and the employee, the greatest loss being that of the worker.