An Economist’s 10 Objections To The Minimum Wage

An Economist’s 10 Objections To The Minimum Wage

An Economist’s 10 Objections To The Minimum Wage by Mark J. Perry, Foundation For Economic Education
Price controls have serious consequences

One of the biggest political issues right now nationwide, and one that will likely be an important issue in next year’s presidential election is the minimum wage.

Economists are generally in agreement that increases in the minimum wage, especially large increases to $15 an hour like in Seattle, will reduce employment opportunities for unskilled workers.

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Despite the inevitable negative outcomes that will surely result from a $15 minimum wage — we’ve already seen negative effects in Seattle’s restaurant industry — politicians and unions seem intent on engaging in an activity that could be described as an “economic death wish.”

Proponents of a higher minimum wage point to the obvious and visible benefits to some workers — those who may find a job at the higher wage or keep their existing job and get a higher wage.

But that is only part of the story — there are many less obvious downsides to an artificially high minimum wages that take longer to recognize, and it’s those inevitable negative effects that lead economists to generally oppose minimum wage laws.

What are the specific objections of economists to the minimum wage and why do they generally favor market wages instead? Here are ten reasons in favor of market wages over a government-mandated minimum wage:

  1. Proposed minimum wages are almost always arbitrary and never based on sound economic analysis. Why $10.10 an hour and not $9.10? Why $15 an hour and not $16 an hour?
  2. A uniform federal minimum wage may be sub-optimal for many states, and uniform state minimum wages may be sub-optimal for many cities. A one-size-fits-all approach to the minimum wage is really a “one-size-fits-none.”
  3. Laws require costly taxpayer-funded monitoring and enforcement mechanisms, whereas market wages don’t.
  4. Minimum wage laws discriminate against unskilled workers in favor of skilled workers, and the greatest amount of discrimination takes place against minority groups, like blacks.
  5. Adjustments to total compensation following minimum wage laws will disadvantage workers in the form of reduced hours, reduced fringe benefits, and reduced on-the-job training.
  6. Many unskilled workers will be unable to find work and will be denied valuable on-the-job training and the opportunity to acquire experience and skills.
  7. Wage laws prevent mutually advantageous, voluntary labor agreements between employers and employees from taking place.
  8. To the extent that higher minimum wages result in lower firm profits and higher retail prices, that’s a form of legal plunder by workers from employers and consumers that is objectionable.
  9. Market-determined wages are efficient, whereas government-mandated wages create distortions in the labor markets that prevent labor markets from clearing.
  10. Like all government price controls, minimum wage laws are distortionary. If you trust government officials and politicians to legislate and enforce a minimum wage for unskilled workers, you should logically trust those same bureaucrats to set all prices, wages and interest rates in the economy. Realistically, if you agree that those economy-wide price controls would be undesirable, then you should also agree that the wage law is also undesirable.

In summary, economists are not unconcerned about unskilled workers, we are actually very concerned about those workers. And it is because of that concern to maximize employment opportunities that economists oppose the wage.

Simply put, we would rather see unskilled workers employed at a market wage — even if that wage is only $5, $6 an hour — that allows them to gain valuable work experience and on-the-job training, than to be unemployed at $0.00 an hour. And unfortunately, a $15 wage maximizes the probability that an unskilled worker will be unemployed at $0.00 an hour instead of being gainfully employed.

This post first appeared at InsideSources. Reprinted with permission.

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