Those in favor of “minimum wage” laws usually have the best intensions. Because of the dependent nature of all wages, those laws cannot achieve their intended purpose. Instead of raising wages, they usually eliminate lower paying jobs from the market.
Wages an dependent variable
To understand the effects or implications of minimum wage, you must first understand that the determination of wages depends on two independent variables: the amount of labor provided and the amount of money paid for that labor.
The ratio between the amount of money and the amount of labor exchanged determines the wage rate. In a free market, the voluntary exchange between the employee and the employer determines this ratio.
The employer determines how much money he willingly offers for a certain measure of labor. The employee determines how much labor he is willing to offer for a certain amount of money. Since money acts strictly as a medium of indirect exchange, the exchange amounts to a specific amount of product output for a specific amount of labor input.
In a free market, wage rates move up and down based on the voluntary payments of employers and the voluntary acceptance of those payments by employees.
Minimum Wage Laws
In a well-meaning attempt to raise the wage rates for employees at the low end of the income scale, legislators pass “minimum wage laws.” However, the government cannot control wages directly because of the dependent nature of wages (as with all prices).
To influence the wage rate, government must change either the amount of money paid or the amount of labor provided. No one can cause wages to change without influencing one or the other of these two variables.
So, let’s have a look at each of the independent variables separately.
Pay for Work
Employers pay employees based on the revenue the employee’s particular job contributes to total revenues. Contrary to many popular misconceptions, consumers have more influence on wage rates than business managers.
Unit prices multiplied by unit volume equals total revenue. Within a relatively narrow range, if a business increases unit prices (to pay higher wages), the unit volume will fall, causing reduced revenue and lower profits or losses.
Profits get reinvested in the business to create more jobs. Losses eventually cause the closing of the business and the loss of many more jobs.
When the government establishes a minimum wage rate, it makes it unlawful for the employer to offer a job below that rate and for the employee to accept a job below that rate.
Work for Pay
Minimum wage legislation has the net effect of barring all those employees willing to accept low pay rates from obtaining jobs paying below arbitrary levels. This prohibition affects youth wishing to make extra money for the family, save for college, or buy more stuff (which can help other low-income workers.) Thus, minimum-wage laws amount to unemployment legislation.
Mandating a specific wage rate higher than that determined by market forces for that particular job, in effect, eliminates that job from the marketplace.
The government cannot mandate the amount of money available for a particular job; thus, by mandating a specific minimum wage rate, they eliminate the possibility of workers accepting jobs below that rate.
Minimum Wage Laws outlaw certain types of work- generally those jobs requiring lower levels of skill and from those who need the jobs the most.