Why the minimum wage hurts the economy

Published on March 5, 2014

Politics

“Un­ex­pected item in bag­ging area” the do-it-your­self check­out ma­chine scolds. A light flashes and a loud beep goes off as I pro­cede with the on-screen in­struc­tions. I’m not try­ing to steal any­thing ; the ma­chine is just be­hav­ing un­co­op­er­a­tively. The com­plete lack of re­ac­tion from the shop as­sis­tants and the other cus­tomers tells me this wis the norm. Ma­chines like this are the con­se­quence of bad eco­nomic pol­icy; let me ex­plain.

Wit­ness­ing the poverty and hard­ship that some in­di­vid­u­als suf­fer just to make ends meet is hard to bear. Our hearts go out to our broth­ers, but not so often to our wal­lets. This is what makes some peo­ple cry out, “Raise the min­i­mum wage!” Sens­ing op­por­tu­nity like a shark smells blood in the water, politi­cians are quick to take on the task. But when pop­ulism trumps rea­son, it is these very same, vul­ner­a­ble peo­ple who suf­fer most.

It seems like a great idea at first. Raise the min­i­mum wage, and all the poor­est peo­ple get a pay rise overnight. The greedy cor­po­ra­tions take a hit to their profit mar­gins and the world be­comes a bet­ter place. Alas, if only it were so sim­ple. Such rea­son­ing dis­counts the re­al­ity of why any­one has a job at all. Wages are a price; some­one’s wage is worked out in the mar­ket­place of sup­ply and de­mand ac­cord­ing to the pro­duc­tiv­ity of the per­son.

By set­ting a min­i­mum wage, the gov­ern­ment is ef­fec­tively man­dat­ing a min­i­mum level of pro­duc­tiv­ity. It is say­ing that if you can’t do some­thing for which it is worth some­one pay­ing you €8 an hour, you must not do any­thing at all. After all, the only rea­son any­body ever gives any­one a job is be­cause they want to make money. If the em­ployee costs more than he or she is worth, the em­ployer is going to do some­thing.

One thing the em­ployer will do is pass the costs on to the con­sumers. Some cor­po­ra­tions might be mak­ing a lot of money, but mar­gins are al­ways razor thin. There is no way com­pa­nies can ab­sorb the costs of a man­dated wage hike. The re­sult­ing price in­creases leave less money in the hands of con­sumers. Once again it is the poor who are worse off.

It gets worse. By ef­fec­tively re­mov­ing the first rungs on the ca­reer lad­der, these un­for­tu­nate in­di­vid­u­als end up never being given the op­por­tu­nity to learn on the job. Even some high school dropout get­ting paid next to noth­ing for fill­ing up your car with petrol and wip­ing your wind­screen is learn­ing a lot of valu­able skills. That per­son is learn­ing to get up early and show up on time. Also, by hang­ing around the petrol sta­tion, he or she might learn enough to be­come a me­chanic. It cer­tainly does them no good to force them to stay home, what would that do to their self-es­teem?

Em­ploy­ers will also try and find more ways to re­duce the num­ber of peo­ple they have to hire. Ex­pen­sive ma­chines, like the one I was using, be­come a more at­trac­tive in­vest­ment. Even though the cus­tomers might not like it as much, they are prefer­able to higher prices. Fewer wait­ers and fewer barstaff means slower ser­vice, but as we vote with our wal­lets and re­ward the es­tab­lish­ments that can give us the best value, em­ploy­ers quickly find they have no choice and make do with less staff. Count­less petrol sta­tion at­ten­dants, bell boys, ush­ers, fast-food work­ers and, as the ma­chine in front of me tes­ti­fies, cashiers, have lost their jobs to the min­i­mum wage law.

Jobs that do not meet the im­posed min­i­mum level of pro­duc­tiv­ity still exist is in the black econ­omy, forced un­der­ground as they are now il­le­gal. Just like any other mea­sure of price-fix­ing, the min­i­mum wage leads to short­ages and black mar­kets. “But that’s not fair” you might well argue, how is some­body sup­posed to raise a fam­ily on less than €8

 an hour? How can they af­ford to pay the rent? That’s no way to live in dig­nity. Such hard­ships are real, but the re­al­ity is that forc­ing fewer peo­ple to have a few euros an hour more will not change such hard­ships, it will only make them worse. Also, why should we as­sume that every job is for the pri­mary wage earner? What about young un­skilled peo­ple still liv­ing at home, mak­ing some extra money for them­selves and their fam­ily. Should they be ex­pected to raise a fam­ily? Is every­one who works ex­pected to af­ford his or her rent?

A video-tale supporting the minimum wage.

Point­ing back to a time of greater hard­ship, the min­i­mum wage apol­o­gists bring up anec­dotes of coal min­ers, dock work­ers and sweat­shops. Such ex­ploita­tion, though real, was prefer­able to those work­ers than the al­ter­na­tives, which often was a life of agri­cul­tural sub­sis­tence. In­creas­ing pro­duc­tiv­ity and cap­i­tal in­vest­ments lifted the masses out of poverty, wage rates were steadily in­creas­ing and sweat­shops dis­ap­pear­ing long be­fore the min­i­mum wage was in­tro­duced. Then what good has this mea­sure ac­com­plished? Politi­cians can take credit for mak­ing ex­ploita­tion il­le­gal, it sure sounds great, but they are just jump­ing in front of the pa­rade of eco­nomic progress and as a re­sult, they are get­ting in the way.

Lastly, but per­haps most im­por­tantly, there is the free­dom as­pect. Why should not a man be free to chose for him­self if a job is worth his while? Who am I, or any­one for that mat­ter, to get be­tween two peo­ple who freely chose to ex­change money for labour? Be weary of well in­ten­tioned cru­saders, pop­ulist politi­cians and un­ex­pected items in bag­ging areas.