I began, several weeks back, by stating that minimum wage laws are a terrible idea. I made several posts laying the ground for the idea that minimum wage laws represent only a small part of the problem of government intervention, which upsets the balance in markets established through unfettered exchange.
I now return to the minimum wage laws and show how they fit into the general patterns of government intervention: redistribution, regulation, and monetary expansion.
We usually associate the process of government redistribution with the confiscation of private property (taxation) and disbursements (spending) to other parties. Minimum wage laws represent a more devious form of redistribution.
Government assesses a different form of tax by forcing employers to pay workers more than a market wage. This process has the same effect as if the government taxed the employer an amount equal to the difference between the worker’s market wage and the mandated minimum, then remitted that amount to the worker. The government receives a sneaky bonus by imposing this form of taxation: the government gets additional FICA taxes from the employee and the employer.
The most obvious intervention of minimum wage laws occurs in the form of regulation. Regulations attempt to get people to shift their preferences by defining acceptable behavior then imposing some form of penalty for non-compliance. Many (most) business licenses do nothing to improve the quality of a product or service provided. The business owners simply prefer to pay for a license and stay in business than close the business and pay a fine or go to jail.
Minimum wage laws apply the same sort of limitations on the free exchange of labor for fair compensation. These laws tell employers that they will receive a punishment for providing a job for less than an arbitrary sum. Employers will prefer not offering a job that they value less than the regulated minimum than providing the job and suffering a penalty.
Minimum wage laws don’t raise wages. They take lower-paying jobs off the market. People willing to accept less pay have opportunities taken from them.
Manipulation of the supply of money amounts to the most insidious form of intervention affecting minimum wage laws. Its effect runs counter to what legislators claim they want for workers. By expanding the quantity of money, government reduces the real wages of all employees—including those at the bottom. As prices and revenues rise, the perceived value of low-end labor seems to increase. Nominal low-end wages increase, but their purchasing power declines. Thus, in real terms, the value of the wage minimum does not increase—and may even decrease.
What the government gives with one hand, it takes away with the other.
Free markets tend toward a dynamic natural balance. They achieve this balance as the result of many individual transactions. Both “buyers” and “sellers” leave each transaction receiving something they value more than what they give up. These individuals don’t worry about the market as a whole; they only wish to satisfy their own preferences. But, when these transactions all link together, they achieve an effective and efficient allocation of resources. They achieve a sort of dynamic balance.
Anything done to intervene in these voluntary transactions upsets the balance throughout the market. One of these interventions consists of minimum wage laws. By preventing the voluntary exchange of labor for wages, the government causes destructive waves throughout the market.
These laws cause some workers to suffer unnecessary unemployment. In some cases, they create an additional tax burden on employers, with the negative effects that added taxes cause. The few workers who seem to benefit from this form of intervention have their real wages diminished by expansionary monetary policy. (Monetary policy ironically intended to maintain full employment.)
Proponents base minimum wage laws on a grand lie: that intervention can improve the natural dynamic balance of a free market.