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Economics in One Lesson: The Evil Minimum Wage

For this weeks “Book Notes” I read up through the chapter entitled “The Function of Profits”.  For next weeks assignment, I plan to finish Economics in One Lesson.

This weeks reading included the chapter “Minimum Wage Laws”.  If I had titled the chapter, I would have called it “The Evil-and-in-all-Ways-Morally-Repugnant Minimum Wage Law”.  In the interest of full disclosure, I have always thought minimum wage laws violated the very concept of a free society.  If I run a small business and work out a contract with an employee to work for me for $5 an hour, why does the federal government believe it is entitled to step in and tell me I must actually pay that person $7.25 an hour?  This is a private transaction between two people.

However, we are told that by having a minimum wage we guarantee people make a just and decent “living wage”.  But do we?  As Hazlitt points out in this book:

The first thing that happens, for example, when a law is passed that no one shall be paid less than $106 for a forty-hour week is that no one who is not worth $106 a week to an employer will be employed at all.  You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less.  You merely deprive him of the right to earn the amount that his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering.

This makes perfect sense if you think the process through and ignore the typical political rhetoric.  Let’s say you own a small business.  Applicant A shows up for a job interview.  While the person is nice enough, you quickly determine they aren’t worth the $7.25 an hour.  You won’t hire this person.  You will wait until someone comes along that you believe is worth the $7.25.   The federal law has made Applicant A unemployable.

The argument is sometimes put forward that we need a minimum wage law, or need to increase it because the gap between the “have’s” and the “have nots” has gotten too big.  First, there is never any evidence put forward with this argument.  Secondly, as the above shows, a federal minimum wage law will only make any gap there is that much larger.  Finally, this gap never takes into account the increased living conditions of today’s “poor” versus their counterparts from 50 years ago.

A minimum wage law is just another instance of the federal government interfering in what should be private transactions between two people.  You can wrap it up in the pretty argument of a “living” wage, or in “helping the poor”, but at the end of the day, its just the government sticking its nose into our private lives when they shouldn’t be there.  It’s a failed attempt to legislate prosperity.

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