The idea of a minimum wage appeals to those on the left with no understanding of business or economics. They believe that a minimum wage helps to ensure that “Greedy Corporations” don’t “exploit” the low skilled workers by paying them “less than they are worth”.
Consider the difference between the market price of an apple and the “worth” of an apple.
You can’t demand that we pay an amount for apples that reflects “what they are worth”, because the amount would be different for each person, zero for those who don’t like apples and hundreds of pounds for those who couldn’t imagine life without their daily apple.
Instead we all pay the market price of an apple, which is the price at which those who have apples to sell value the money on offer more than the apples and those who wish to buy the apples, value them more than the money they give up.
The same is true of wages, the market wage rate for a job is the worth of that job. The idea that the market wage rate for low skilled workers is less than they are worth is meaningless. Less than they are worth to who ?
There is no “true/divine/absolute” scale of worth, against which wage rates can be measured and found to fall short of.
The statement “paid less than they are worth”, is simply another way of saying “I want more!”
The idea behind the minimum wage is to increase the living standards of the low skilled worker, above that which they can earn from voluntary agreements with employers in a free market. It fails completely in this objective.
What it actually accomplishes is a net lowering of living standards for low skilled workers…..
The reason that businesses employ people is because they generate more profit for the organization than they cost to employ. A profit motivated employer will continue to recruit more and more people until the extra profit gained by adding another person is less than they cost to employ.
A minimum wage law increases the cost of employing low skilled labour. This means that the point at which employers stop taking on additional staff comes sooner. So less low skilled workers are employed.
It gets worse, the increased cost of low skilled labour means that in some circumstances it tips the balance, making it more cost effective to replace the low skilled workers with machinery, rather than pay them at the new higher rate. This leads to more low skilled workers losing their jobs.
It gets even worse, the increased cost of low skilled jobs means that employers have to pay a rate that in the open market can attract a higher skilled employee. They therefore re-design jobs to include some low skilled work and some higher skilled work to justify the higher rate. Lacking the higher skills means that jobs suitable for those only with low skills disappear and more low skilled workers lose their jobs.
It gets even worse, for some companies that employ large numbers of low skilled workers the increase in their costs can make their whole business model unprofitable and they go bankrupt. This leads to the closure of the types of businesses that employ large numbers of low skilled workers, so more low skilled workers lose their jobs.
The net result of a minimum wage is that a far greater number of low skilled workers become unemployed whilst a minority earn a higher hourly rate.
I have been accused (in comments on a previous post) of not providing any empirical evidence for any of this. To me the logical clarity of the process does not require any. If you accept that businesses are motivated by profit and you put up the cost of labour then the above is inevitable.
However, let me answer the critics, by considering empirical evidence and the law of gravity.
If I understand the law of gravity, I do not need to show empirical evidence that a particular apple will fall from a particular tree to the ground. Once I understand the nature of the forces at work it is clear that objects with mass will always be pulled towards the earth by gravity.
If I stand at the top of a tower on a windy day and drop a feather it may go upwards. This does not mean that gravity has been empirically disproved and no longer exists! It means that other factors, such as the wind have overcome the force of gravity.
If I drop a pea, it may not fall to the ground, because gravity is still overwhelmed by the wind. It does not mean that gravity is not having an effect, it just means that the effect is difficult to isolate in the observation.
However the larger the object I drop, the more the impact of gravity can be seen. If I drop a cannon ball, you can be sure it will fall to the ground and the effect of gravity will be clear to all.
Empirical evidence in the social sciences is worse than dropping a feather on a windy day, you simply cannot isolate all the variables at work, so it is impossible to see which factors are causing what effect. (Which is why Keynesian economists are so confused)
In the case of the minimum wage:
If the minimum wage is less than the market rate it is not expected to have any impact.
If it rises just above the market rate it is like the feather in the wind. It has a negative effect, but it can’t be seen because of the greater effects of changes in industry, technology, demographics, etc, etc, etc.
The higher the rate is set above the market rate the more strongly the negative impacts can be seen.
But a simple thought experiment can sweep away all the confusion:
Imagine that the minimum wage was set at £100 an hour. (Dropping the cannon ball).
Does anyone really think that we would all become rich, or would the things I highlight above, inevitably happen and all but the most skilled and valuable employees would find themselves unemployed ?
If you still want empirical evidence, how about this: