Minimum Wage Laws: Discriminating Against Low-Skilled Workers

In this year’s edition of the annual political show known as the State of the Union Address, President Obama called for the federal minimum wage to be raised from its current $7.25 per hour to $9, and indexed for inflation.

However, like so many other government programs enacted by well-intentioned saviors of the lower class, the minimum wage has harmed the very people it was purportedly enacted to help. As Milton Friedman said, “The minimum wage law is most properly described as a law saying, ‘Employers must discriminate against people who have low skills.’”

There are many possible reasons why someone may have low value as a prospective employee, including lack of skills, education or work experience. An employee will only be hired if he provides a reasonable benefit to the employer. Therefore, all those people whose labor is worth, say, $6 or $7 an hour will now be priced out of the labor market, all because of some well-intentioned suits in Washington believing that they can determine a worker’s value better than he himself can.

Predictably, the negative consequences of the minimum wage fall on those individuals at the bottom of the labor chain, and on those ethnic/age groups that generally have the lowest levels of education and skills — most specifically black teenagers, a demographic whose unemployment rate is currently more than five times the overall unemployment rate.

Most importantly, the minimum wage law has no place in a free society, for it is an immoral intrusion into what should be a free market. Consenting adults should have the right to agree on the price they pay and receive for labor, just as they have the right to agree on the price they pay and receive for any product. Each individual is most aware of his own value, how much he is willing to work for, and should be the only decision-maker in that process.

It is simply impossible for any group of people — including people who wear  fancy suits and work in Washington — to know the “proper” value of the labor of an individual he or she has never met and knows nothing about, whether an immigrant farm worker, a young stock boy or a secretary just out of high school. To legislators, $5 or $6 an hour may seem like very little money, but it’s a lot more than $0, the wages of someone who is unemployed due to being priced out of the market.

The minimum wage essentially is a tax for a social program that falls exclusively on one person or entity: the employer. If the government believes people should make a certain minimum amount of income, then that cost should fall on society as a whole — through general tax funds — rather than on an individual employer. Confining the cost to employers is unfair to them, and harms employees by artificially raising the cost of their labor.

Of course, even with an increased minimum wage, there are a certain number of employees that a business owner will have to hire. But employers will have to make up these costs somehow: perhaps by hiring fewer workers, or by raising prices on products. This will increase the cost of goods and services purchased by everyone, including the minimum wage worker, who may now have more money to spend, but finds that the cost of living has also risen.

Furthermore, as George Mason University economist Russ Roberts points out, there are so many other aspects of employment besides the usually-discussed issues of price and quantity, including how hard you have to work, how many breaks you get, how kind and understanding the employer is, how nice the walls of the office look, et cetera. The government artificially raising the cost of employment can have negative consequences on many other aspects of employment.

The great economist Armen Alchian died on Tuesday at the age of 99. In a 1977 essay titled “Economic Laws and Political Legislation,” he said:

“Minimum wage laws ostensibly devised to raise wages of the lowest wage earners do not. The number of employees an employer can profitably hire is reduced. Some lose jobs and must work at lower paying jobs exempt from the law, or if none is exempt, work as self-employed, for which there is no minimum wage law, or simply leave the workforce, or substitute poorer working conditions for the higher wages. Even those who retain jobs are not better off in the long run. Some who would be displaced will offer to work (at the higher wages) with less nonmonetary pay — stricter discipline on the job, poorer circumstances such as less time off, fewer coffee breaks, vacations, or fringe benefits. Employees will offer to forsake some of those things for the higher required wage rate to retain existing jobs, rather than take the inferior alternative of working in jobs not covered by the law, or becoming self-employed or departing from the labor force into ‘leisure.’ Economic law is not suppressed by legislated law.”

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