If there is a silver lining to the dark clouds on Wall Street, it’s that people are finally waking up to the realization that something is fundamentally wrong with the U.S. economy. Unfortunately, most citizens accept long-refuted economic myths and, thus, incorrectly prescribe more government to cure a problem caused by too much government. Students of the Austrian school of economics know that government intervention into the economy—regulation—almost always has the opposite of its intended effect. A good case study for this is the minimum wage.
The federal minimum wage was $5.15 per hour from September 1, 1997 to July 24, 2007. Thanks to the money-supply expansion of the Federal Reserve, the purchasing power of that $5.15 dwindled to $3.99 over the ten-year period, meaning that minimum-wage workers received a 23% pay-cut in real terms, even as their nominal wages remained the same.
The Minimum Wage in Action Encourages Inaction
Obviously, a person earning $5.15 an hour for the standard 40 hours per week—$206 before taxes—could not afford to support a family. This was one of the arguments for raising the minimum wage to $6.55 (it will go up to $7.25 by 2014). But are all wage earners supposed to be able to raise families on their income?
Consider the single person, fresh out of high school, who has no interest in college. In fact, he has no interest in leaving his parental abode, where Mom does the laundry and Dad pays the cable bill. He wants as much money as he can get for his labor, of course, but he has no need to support a family. And since he’s a bit of a slacker and not all that bright, he doesn’t have the skills to merit $6.55 (plus payroll taxes, workers’ compensation, unemployment insurance, etc.) in hourly pay. In order to find employment, he’ll have to stumble upon someone willing to pay him more than he’s worth.
Maybe our slacker could add $5 per hour of marginal utility as the third worker at a donut shop—marginal utility tends to decrease as the number of employees increases. The slacker would be happy to work ten or 12 hours a week at this rate, which would allow him to buy a new video game every Tuesday. But the donut-shopkeeper cannot afford to pay him $6.55, which would result in a loss of $1.55 an hour for every hour the slacker worked, so as a result, the slacker continues to mooch off Mom and Dad, never getting a chance to build up the work experience that could lead to better jobs in the future—and a new outlook on life.
Free Market vs. Government: How Wages Are Set
Employees are generally paid based on the amount of profit their work contributes to their employer’s bottom line. After all, in a competitive job market, employers are incentivized to pay as much as they can afford to in order to attract the best workers. Government regulation, however, leads to diminished competition between employers and more competition between employees. Regulation, including the minimum wage, is what pushes wages down.
For example, imagine the government set the minimum wage at $25 per hour. Some people in the $20-$24 range would get a pay boost, but people earning much less than $25 would undoubtedly be let go. After all, if they were really adding more than $25 of hourly utility to their employer, they’d be making more than $8, $10, or even $15 an hour.
In this scenario, unemployment would be very high, and thus jobs would be extraordinarily scarce. Thus, instead of employers competing for employees, job-seekers would be fighting one another for jobs. This would push wages down, not up, and healthcare and other fringe benefits would unquestionably be cut.
The $25 scenario might be seen as a little extreme, but the principle holds: when you mandate a minimum wage, workers whose labor contributes significantly less than that wage to the company’s well-being will be fired, and the scarcity of the remaining jobs will lead to greater competition among employees, not employers. And far from hurting only “slackers,” minimum-wage laws hurt the most vulnerable members of society.
How the Minimum Wage Promotes Crime
Consider this: when people are priced out of the job market, what do they do? They can turn to a life of government dependency on welfare, or perhaps, in an effort to preserve their dignity, they can turn to crime. Yes, crime can be honorable in the interventionist state. After all, anyone who works for less than the minimum wage is by definition a criminal, as is their employer. But too many people, who would otherwise be productive workers in the “overground” economy, do turn to lives of actual violent crime when they have nowhere else to turn.
Poor people in the inner city are most susceptible to these deleterious effects of the minimum wage. Employers want work experience, which is impossible to get if you never have a first job. And you can’t get a first job when your marginal utility is less than the minimum wage. In the old days, people could agree to work for initially low wages to get their feet in the door, but this is illegal now. And even worse yet, inner-city entrepreneurs, who could better their impoverished communities by providing jobs, are stifled by the minimum wage and other regulatory red tape.
Who is the Minimum Wage Good For?
One common critique of raising the minimum wage—that it causes inflation—is 100% false. Only expansion of the money supply can cause inflation, and raising wages does not produce more money—only the Federal Reserve can do that. However, this inaccurate criticism is actually worthy of consideration because, if the minimum wage did cause inflation, it would actually be less destructive than it is. For if it simply caused prices to rise throughout the economy, then employers would be more easily able to afford the higher wages. The truth is, it doesn’t, and they can’t.
So the minimum wage is clearly bad for workers and entrepreneurs and good for the government, which expands its sphere of influence as more citizens turn to welfare and criminality. But left-liberals should also note that, by tightening the labor market, the minimum wage benefits large corporations, too. After all, why do you think Wal-Mart supported the most recent minimum-wage hike?