Minimum wage laws are often put forward as regulations that help everyone. If anyone is hurt, it is wealthy capitalists who can afford to lose a little money. Unfortunately, this is rarely the reality. In order to decode the impact of minimum wage laws, one has to examine the effects on multiple levels, examining both the seen and the unseen consequences. Increases in wages have to be paid for somehow, and given the interdependent relationship of a market, there are three major players who are impacted by minimum wages: employers, employees, and the consumers.
1. Employers
Employers are faced with the increased costs of the factors of production without any corresponding increase in value. Although minimum wages are argued by pointing at multinational companies and the profits they are raking in, MacDonald’s and Wal-Mart are not the only ones paying minimum wages. Indeed, they are the least affected, since their enormous profits enable them to cope with the increase in wages.
It is the small emerging businesses that are harmed the most, the local businesses that provide employment in their neighborhood to people who would have otherwise remained unemployed. Minimum wages punish small time entrepreneurs by decreased profits — especially when profit margins are razor thin, as is usually the case. This fact helps to deter entrepreneurs from opening businesses, and this is doubly unfortunate when we consider the fact that minimum wages are often a legislative reaction to an excess labor supply in the first place. When wages are low is precisely the time when we need new entrepreneurs the most.
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Moreover, these wage increases do not take into account the opportunity cost, i.e., the cost of the next best option. The higher the minimum wages, the more lucrative other options such as automation appear.
2. Employees
For the employees, the most frequent repercussions are reduced work hours or loss of job. Neither helps in increasing the total wage of the employee, reminding proponents that good intentions do not translate into good outcomes.
Furthermore, minimum wages encourage employers to discriminate against lower skilled people, as evidenced in the gigantic increase in teenage unemployment under minimum wage laws. Indeed, this was once common knowledge, which is why racists once encouraged the implementation of minimum wage laws as a way to exclude lower-skilled non-white workers from the marketplace.
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Today, minimum wage laws are often advocated with the intent of increasing wages for groups of unskilled workers. Unfortunately, the results are the same now as they were when the laws were imposed to exclude workers.
Thomas Sowell explains further in Basic Economics:
Unemployment among 16 and 17-year-old black males was no higher than among white males of the same age in 1948. It was only after a series of minimum wage escalations began that black male teenage unemployment rates not only skyrocketed but became more than double the unemployment rates among white male teenagers. By 1954, black unemployment rates were double those of whites and have continued to be at that level or higher.
The real impact of the minimum wage, therefore, is to make it illegal for lower skilled people to be employed, as is the case with black unemployment.
3. Consumers
The impact of minimum wage laws on the consumer is felt through an increase in prices, as firms attempt to recover some of their raised production costs. Since employees are also consumers, they are to be impacted by the boost in prices, which reduces what their money can actually buy. Price increases that accompany minimum wage hikes thus lower the real wages of those who are lucky enough to keep their jobs as new minimums are imposed.
Moreover, as minimum wages force cash-strapped small business out of business, consumers enjoy fewer choices.
Aside from these disadvantages listed above, there exists yet another drawback: Wages indicate to workers the value of work in various fields. Low wages would ordinarily convey to a worker that it may be best to avoid work in low-wage areas, and seek employment elsewhere. However, when wages for a service do not decrease with a decrease in value for that service, the deterrent (in the form of lower wages) is not present to redirect the resource to better-valued uses. If, as certain people claim, minimum wages are insufficient to meet the needs of workers, then workers ought to shift to a different profession.
By manipulating minimum wages, however, employees cannot avail themselves of the price signals offered to workers by wages — wages are, after all, the price of labor. Workers are then less able to determine what industries and fields already have too many workers, and which fields have too few.
The result is the same whenever governments intervene and distort markets and pricing: misallocation, malinvestment, and impoverishment.
