One of the most popular economic fallacies of our time is the belief that the absence of a minimum wage would lead to limitless exploitation of employees in the economy. Minimum wage legislation prevents employees from being hired at pay rates below the mandated amount. Proponents of minimum wage laws claim that not having a minimum wage would lead to employees being paid very little for the amount of work they do. They also claim that everyone ought to be entitled to some standard of living and that minimum wages are instrumental in ensuring better conditions for everyone. Ultimately, arguments for minimum wage laws do not stand up to scrutiny.
The most important reason to oppose minimum wage laws is that they violate freedom of association and freedom of contract. It prevents two willing and able parties from coming to a voluntary contractual agreement if the wages are below the legally-mandated minimum. While minimum wage limits are often relatively low, their imposition entails that legislators believe some wages are too low and that they must take measures to prevent work being done for “exploitative wages.” Naturally, this means that some jobs will cease to exist since jobs that pay below the legally-mandated amount will no longer be worthwhile for the firms. As a result, minimum wage laws necessarily destroy some jobs in the economy.
Arguments for minimum wages rest on economic fallacies. One of the most popular ones is that minimum wage laws prevent exploitation by setting a standard limit under which firms cannot go. A key, but mistaken, assumption in this line of thought is that without minimum wages firms would simply drive wage rates lower and lower and employees would have no choice other than to accept whatever they are given. This ignores the fact that all agreements require at least two consenting parties. Hardly anyone would agree to work a job which pays nothing or pays a disproportionately low amount for the amount of effort and skill required.
Employees set the floor in negotiations as they would not work for too low an amount while firms set the ceiling as they wouldn’t pay exorbitant amounts which would cause them to be unprofitable. If the lack of minimum wage legislation allows firms to drive wage rates low, we must ask ourselves why certain jobs that pay much more than the minimum wage exist. Clearly there must be other factors that impact wages which would invalidate the talking point of limitless exploitation.
Employees also do not have the right to a minimum wage. Their work is only as valuable as what they can fetch on the free market. I might believe that the work I can do is worth a thousand dollars an hour, but if no firm is willing to offer me that much money, I don’t have an entitlement to it. The same is true at any wage rate, even the minimum wage rate. Many seem not to grasp this fact as advocates for a minimum wage often state that no work is worth lower than the minimum wage amount. This ignores the nature of work and that work itself does not have intrinsic value.
While minimum wage laws fail to deliver on their benefits, their consequences are more potent. Since minimum wage laws destroy some jobs, there exists a percentage of the workforce which would have had employment in the absence of these laws. Businesses are also forced to operate either on higher costs or with a lower workforce which either raises costs for consumers or leads to lower productivity. While the advocates of minimum wage legislation believe they operate from a higher ground of morality, their policies only hurt the ones whom they wish to help the most. Repealing these laws can only lead to a better economy.
