Many cities and states throughout the country have raised their minimum wage well above the federally mandated level. It’s important that we not be enticed by the rhetoric of a so called “living wage.” The big misconception here is that wages are arbitrary, thus raising the minimum wage will simply force firms to pay out more to their workers and accept lower profits. But wages are not arbitrary; they are determined by the amount of value that a worker provides to his or her employer. Allow me to explain the harm of minimum wage cutoffs through a story.
Johnny is an 18-year-old kid who is soon to graduate high school. Having subpar grades and very little interest in an ongoing formal education, Johnny is forgoing college and is instead looking for a job. Because Johnny has no skills or work experience, the highest amount of productivity he could possibly hope to bring to an employer at this point in time is $7 per hour. However, the minimum wage in Johnny’s state is $10 per hour. If a firm were to hire Johnny at the minimum wage, they would be losing $120 per week on the exchange, assuming he worked 40 hours. No firm will pay $400 for a service they value at $280.
What is Johnny to do in this situation? He needs skills and experience to land a job, but he needs a job to acquire skills and experience. Needless to say, this is not a position we would wish upon the most vulnerable individuals in our society.
The minimum wage is not a law saying that employers must hire employees and pay them X amount. Rather, it’s a law saying that if employers wish to hire workers, they can’t offer to pay any less than X amount, regardless of whether both parties agree that they are made better off by the exchange. In the absence of a minimum wage, a worker can decline a job offer if he determines that he is not made better off by accepting it. Minimum wage laws only reduce a worker’s opportunity.
If raising minimum wages doesn’t create unemployment, as its proponents claim, why stop at $15? Why not $100, or even $1,000? As far as solving world poverty, we would need only go around to all the poorest countries and encourage them to pass laws requiring that all their workers be paid millions of dollars. Clearly we can see that this would not work. Wages are determined by how much workers are able to produce. The only way to make a society wealthier is to increase its productive capacity.
Workers and businesses alike are hurt when the government enforces price controls. Don’t be fooled into thinking that the price of labor is somehow immune to the laws of economics. The minimum wage hurts the very people it intends to help, and I hope we can all agree that results are more important than good intentions.