The unintended consequences of the minimum wage

The real minimum wage is zero: unemployment.” – Thomas Sowell

The minimum wage is one of the most persistent and pernicious economic policies, probably only surpassed in ineptitude by rent controls and farm subsidies.

Economists have recognized for decades that minimum wage laws result primarily in increased unemployment among the most vulnerable sectors of society, specially poor unskilled teenagers of racial minorities.

The amount of evidence to back this is huge, but still people refuses to accept that just because it sounds like a good idea to magically give poor workers a raise it doesn’t mean that it actually works this way.

Ironically the main groups that consistently lobby to raise the minimum wage are unions of skilled workers that already earn much more than the minimum wage, and big business in the retail market who offer salaries slightly above the minimum wage.

This unholy union of unions and big business can be explained if one looks at the real consequences of raising the minimum wage: unskilled workers that might be able to compete with unionized workers thanks to their lower salary are put out of work safewarding the jobs of the well off unionized workers. At the same time small retail business that have very small margins are driven into bankruptcy by big corporations that take advantage of economies of scale and can afford to pay their workers salaries slightly above the minimum wage.

Alternatives

If our goals is to improve the economic situation of disadvantaged workers probably the best known strategy is a negative income tax, this doesn’t create negative incentives and preserves the existing positive incentives, it doesn’t directly increase unemployment or hurt small business.

Quotes

Reduced employment opportunities is one effect of minimum wage legislation. The minimum wage law has imposed incalculable harm on the disadvantaged members of our society. The only moral thing to do is to repeal it.” – Walter Williams

Links