Minimum Wage | Good or Bad Idea?

According to many politicians we only need to raise the minimum wage! If the task is as easy as passing merely one bill, if this will make all workers earn more, then why not just raise the minimum wage to $10,000 or even $20,000? Precisely because it’s not that easy, and because the consequences of such a law would be grave indeed.

There is a minimum wage in place already. But some people still earn more than this amount. Why would employers pay workers more than they lawfully need to? Are they mad? The answer is simple: they have no other choice. The employee sells his work to the highest bidder. The employer acts in an opposite manner: he wants to hire the best possible worker for as low a price as possible. If you have a unique set of skills, one that will earn big profits to the company that will hire you, then potential employers will want to offer you more money or other benefits to get you to work for them instead of their competitors. However, if the job does not require high qualifications, then there will be more such workers available on the market; thus, if these workers want the job, they will be forced to agree to a lower wage.

The labor market is guided by the law of supply and demand. The more expensive something gets, the lower the demand for it will be. By raising labor costs, and making employment more expensive, the government lowers the demand for labor. But at first this won’t impact those who already earn more than the minimum wage. Because the work of the least qualified employees is worth less than the minimum wage, they will suffer the most, even though they were supposed to be protected by government from destitution. Who are these employees? They are mainly young people fresh out of school, and they don’t yet have any practical skills nor professional experience. These people would be often willing to work for less money, because they need it for a date or for an evening meeting with friends, while having no family nor house to maintain. This first and simplest step in their future careers is best suited for them at the time. They badly need to get first experience, credibility, and self-discipline, as these things are key conditions needed for their careers. If these conditions are met, then the next employer will feel secured that as employees these young people can endure a year or two of work, and that they are probably punctual, because nobody fired them before. If such young prospective employees can show positive references from their previous jobs, then it means that they were able to handle their responsibilities well, and they probably are prepared to handle more demanding tasks. This entry-level job is not their last, and it doesn’t need to sustain their families; it’s only a means to an end. The time spent at the entry-level job should be used to acquire the skills necessary to go up on the career ladder.

All the government does by setting the minimum wage is to destroy the lowest rung on this ladder. This means that it will be harder for people starting their careers to “put foot in the door”, trying to make their entrance to the job market.

If someone’s work is worth $5 for an hour, then despite the minimum wage law nobody will pay him $6 per hour (nor more). In effect such a person will become unemployable. Which one is better? No income at all, or lower income awarded with job experience? In such a situation an unemployed person has to gain additional education, or get unpaid on-the-job training. The consequence is over-abundance of university graduates in regard to market needs.

But what happens when an employer has no other choice but to raise wage to an enforced minimum, for example because he needs employees for a production department in his company? He will either fire some of them while dumping additional tasks on the remainder of his staff, or he will shift the additional costs to the customer to be able to satisfy his company’s goals, such as its business objectives and expected rate of return on investment. And since he still has to pay more, then he will choose to fire a least qualified person, and employ someone who has better qualifications. This new employee will be then required to perform tasks below his competence level. After all, the employer wants to have the most qualified people he can get.

The effects of minimum wage are all around us. Many products or services are getting more expensive, the requirements for entry-level jobs are getting higher and higher, and unemployment among young people is high.

Usually such changes are prompted by labor unions. It seems that their goal is not for the workers to earn more, but to protect union members who are stuck on the second rung of the career-ladder from a new generation that could do the same job cheaper. The government is satisfied with this arrangement, as it now collects more taxes from the higher wages it just enforced.

The answer is simple: let the free market operate. Remove the burden of taxes and other levies on work, do not interfere with the freedom of contract, stop impeding formation of new companies to allow more competition between employers for the employees, and — last, but not least — let interest rates freely adjust to market conditions, so that people would again save and invest. One should also convince other people that the amount of their earnings depends on their own actions, and that the government won’t do their work instead of them. A higher value for the employer = higher earnings; there is no getting around the fact.