I frequently see Democrats propose a significant increase in the minimum wage, also known as a "living wage," as a solution to what they see as the exploitation of the lower class. This would be disastrous. A price floor for unskilled labor has a multitude of negative effects on the very people it's meant to help. The minimum wage in the United States is close to the equilibrium rate for unskilled labor, but the following negative effects would become far more pronounced if the government mandated a significantly higher living wage.
- A minimum wage reduces the freedom of employees and employers. Just as a minimum wage tells the employer, "You may not hire employees below this rate," it also tells workers, "You may not accept work unless you can compete at this rate."
- An employee desperate for a job cannot undercut minimum wage workers. Minimum wage laws are regularly peddled in third-world nations as an instrument of discrimination to prevent minority groups from competing for jobs.
- Lower profit margins for employers encourage them to outsource jobs or switch to a business that does not employ low wage workers, thus decreasing the number of minimum wage jobs available.
- Employers pass higher costs to their customers by raising the price of services, which disproportionately increases the cost of living for the lower class.
A minimum wage benefits some at the expense of the least experienced and least productive workers. It renders the least employable workers unemployable.
If the goal is to improve the quality of life for the lower class, much more effective solutions exist. The best solution would be to reduce the supply of unskilled labor through voluntary vocational training programs. This would empower workers to take higher paying jobs while driving up the equilibrium rate for the remaining unskilled workers.
Heavy-handed government solutions that make more economic sense than a minimum wage include a negative income tax or earned income tax credit, both of which pass the financial burden to the entire society rather than the employers and customers of unskilled workers. A more radical proposal is a social security program of basic income.
Wow, such nice insight Matt! As one who was gone through many lower income jobs (I know I have been lazy, you know me) that minimum wage forces standard of living to be high, like in California. This can also lead employers to find ways around the laws in order to facilitate the low-end jobs (outsourcing, hiring migrant workers).
If unemployment is high would a lack of a minimum wage cause a race to the bottom that makes life terrible for all involved?
I think one of the assumptions you made is that having skills always leads to better job opportunities. I'm not sure that is true.
"The best solution would be to reduce the supply of unskilled labor through voluntary vocational training programs. "
I'm not sure that would do much during times like the Great Depression.