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Labor Economics #3 - The Minimum Wage

Labor Economics #3 - The Minimum Wage
by Alex Merced

One of the most sancrosanct bastions of Labor laws is the minimum wage, and if you want to go beyond this article in learning about it listen to Roger Garrisons lecture on topic from Mises U 2010. Essentially what I want to demostrate through a brief example is...

1. The Minimum Wage actually transfers wealth from the those at the bottom, to the people marginally above them, so it transfers wealth upwards instead of downwards like it intended.

2. The Minimum Wage Creates Unemployment

So let's imagine a world with 300 people in Labor force working at the current wages.

100 People working at $8/hr ($800 spent)

100 People working at $7/hr ($700 spent)

100 People working at $6/hr ($600 spent)

of course, the lower paid workers are the lower skilled and lower educated workers who may be payed more in the future if they learn skills and information on the job. What happens right now is that the economy can allocate work for the entire labor force at these wages, but what happens if we establish a minimum wage of $7/hr. Now our workforce looks like so...

100 People working at $8/hr

185 People working at $7/hr

15 people unemployed

The minimum wage law did not make these employers magically have more resources, so the $600/hr that was was going to the 100 laborers at $6/hr in the first scenario can now only afford to continue to employ 85 out of the 100 laborers leaving 15 unemployed since there is no more resources to employ them. Essentially the lower you are on the wage ladder the more negatively affected you will be by an increase in the minimum wage, it's those in between the bottom wage and the new minimum wage who benefit at the cost of those at the bottom.

(NOTE: One may ask why wouldn't the labor force reduce the wages of the $8/hr workers to keep the $6/hr workers? The answer is simple, the $8/hr workers add more value which is why they are payed a higher wage in the first place so if you had to choose between possibly causing a valued worker to quit from a  pay cut or laying off workers who add the least value you'd choose the latter.)

So this example shows how it causes unemployment, and how increases the wealth of a few at the cost of not those at the top but those at the bottom. So what happens to these unemployed people, they still have to find work so they may move to another location with a lower or no minimum wage in which they can enter the labor force at their skill/education level. Although, if these uneducated/unskilled people migrate from all the places with a minimum wage to this one bastion of freedom with no minimum wage it causes a huge concentration of uneducated/unskilled people in one place.

This explains why the places that are the most free sometimes seem to have some large concentration of uneducated people (a very gross and misplaced charachterization of many souther red states), not because freedom is backwards but because these free places are the only places that will welcome with open arms those from other locations who've been kicked out by wage laws, forbidden to enter the labor market and develop the skills to later make higher wages.

"Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!"
- Statue of Liberty

Posted Aug 14 2010, 07:03 PM by Alex Merced


Alan Gingles wrote re: Labor Economics #3 - The Minimum Wage
on Sun, Aug 15 2010 12:52 PM

I can see how this is true in some cases , where the employer has a low profit margin , but surely where the profit margin is high the employer would soak up the cost of the increase in minimum wage?

I believe some sort of minimum standard of living , perhaps , rather than a minimum wage should be enforced by the government in the Uk because some minimum wage earners abuse alcohol or drugs , have gambling habits or what not. These people have less to spend on food , housing , their children etc. If it were up to me we would employ and train volunteers ( probably unemployed ) to a minimum level so they could carry out building projects and this way they would be trained and could move to places like australia where they are needed and we would have our green housing. I would have families on unemployment benifits growing food in their gardens , this would feed them, educate them , give them a sense of pride and keep them out of trouble.