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I was in a Facebook discussion the other day about the minimum wage and as usual it’s next to impossible to talk to someone who supports the minimum wage because they’ve bought into all the propaganda regarding it. I heard all the cliche arguments in support of it: How without the minimum wage people would be forced to work for slave’s wages, how big greedy companies would exploit workers, how the minimum wage is just an effort to provide low-skilled workers with a ‘living wage.’ It’s that last one I like. The federal minimum wage is currently sitting at $7.25 per hour. Assuming 40 hours per week, that will earn you slightly over $15,000 per year. That’s about $8,000 under the federal poverty line for 2012. What’s that about a living wage?

Anyway, most people who are in favor of the minimum wage only see one side of the equation; the side that benefits from the higher wages. What supporters fail to take into consideration are all of the unintended consequences that government manipulation in the free market brings. Let’s call it for what it is, minimum wage laws are a form of government price control. The minimum wage is a price control on labor that forces employers to pay no less than the arbitrarily agreed upon price for labor. Whenever the government begins messing with the free market, there are always unintended consequences as the market adapts to the attempt to control it. One of the unintended consequences of the minimum wage is that it doesn’t force employers to pay all workers the minimum, but only those workers they choose to keep. This is a crucial point that supporters of the minimum wage fail to understand. They think that by magically setting a minimum wage that all workers will be paid at least that minimum wage. However, what actually happens is that employers will either choose to lay off lower skilled workers or refuse to hire more workers. Why is that? Are these ‘blood sucking’ capitalists that cruel? Of course not! The reality is that employers cannot long stay in business paying someone $7.25 an hour for work that doesn’t bring at least $7.25 of value back into the enterprise.

Allow me to illustrate this with an example. Suppose I own a burger joint and I have three people working for me: Bill, Bob and Jack. Let’s say that for each burger they flip, I get $0.10. Finally, let’s say that Bill, Bob and Jack all make $8.00 per hour. Bill is an exceptionally good burger flipper and he flips 120 burgers per hour. That means I make $12.00 per hour for Bill’s work, for which I pay him $8.00. This nets me a profit of $4.00 per hour. Bob is also an outstanding burger flipper who flips 100 burgers per hour. That means I net $2.00 per hour for Bob’s work ($10.00 minus $8.00). Jack is a decent burger flipper who flips 90 burgers per hour for a net profit of $1.00 per hour. All three workers make a profit for me, so all is good so far. Now suppose the government passes a law that raises the minimum wage to $9.50 per hour. Taking that into account with the above scenario, let’s recalculate the profit my little burger joint makes. Bill still earns me a profit, though not as much as before ($2.50 instead of $4.00). Bob also still earns me a profit ($0.50 instead of $2.00). However, Jack doesn’t fare as well, his under performance ends up costing me $0.50 per hour. I make more money by not employing Jack than I do employing him. Being a smart business man, I have to let Jack go since his value as an employee isn’t equal to what I’m forced to pay him. Furthermore, Jack can’t negotiate with me for a lower wage commensurate with his output because I can’t pay him any lower than $9.25.

In this scenario, the good and kind intentions of the government in attempting to provide a living wage for low-skilled workers backfires and ends up hurting the people it’s supposed to help. Not only does Jack lose his job, but I can’t hire someone unless their output exceeds what I would have to pay him. There are two takeaways from this little scenario:

  1. The minimum wage doesn’t help the workers at the expense of the employers. Instead it helps the more productive workers at the expense of less productive workers
  2. Many of the workers that the minimum wage does help would have been better off anyway

In #1 above, the minimum wage law helps Bill and Bob, but harms Jack. In #2, since Bill and Bob were more productive workers, they would have eventually been paid more because they brought in more value. If I didn’t end up paying them more, then a competitor would try to hire them away from me by offering a little more than what I’m paying them. However, Jack is still unemployed thanks to the government’s good intentions.

This is what we see in the real world. The minimum wage has little or no effect on college graduates because many of them would be getting salaries well in excess of the minimum wage. However, the minimum wage has a much more adverse effect on high school grads, low-skilled and unskilled workers. Consider the levels of unemployment in teens, especially minority teens. Yet reality doesn’t seem to phase the supporters of the minimum wage; they still trot out the same old tired rhetoric despite the facts staring them in the face. Here’s my challenge to supporters of the minimum wage. If the minimum wage is such a good and fair concept, why tinker around with $7.25 an hour? As we’ve seen, $7.25 an hour barely exceeds $15,000 a year, which is well below the poverty line. If you really advocate for a ‘living wage,’ then why not make the minimum wage $50,000 or $100,000 per year? I think we all know the answer to that, which betrays the fact that minimum wage supporters aren’t willing to put their money where their mouths are.

Libertas Aut Mors!