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An Economic Fallacy: The Truth Behind Minimum Wage Laws

Updated on July 13, 2014

"Unfortunately, the real minimum wage is always zero, regardless of the laws, and that is the wage that many workers receive in the wake of the creation or escalation of a government-mandated minimum wage, because they lose their jobs or fail to find jobs when they enter the labor force."

- Thomas Sowell, Basic Economics

Minimum wage laws serve one purpose: social justice. Some individuals – whether politicians, liberals, bleeding hearts, or community organizers – think higher minimum wages will increase one’s livelihood. Such thinking is an economic fallacy, not to mention racially biased. Minimum wage laws are, however, politically fruitful and often rewards those who make the laws.

Uneducated individuals usually believe no minimum wage law will result in $1 hourly wages. Anti-free market supporters may think fewer employment laws benefit just one side of the economic equation: big business. And yet another group – union supporters – seeks positive economic reform through higher minimum wages. Unfortunately, neither of these theories or beliefs is correct.

Minimum wage laws are a controversial - yet often politically fruitful - economic topic.

Piggy Bank In A Row
Piggy Bank In A Row | Source

Minimum Wage Fallacies Debunked

Let’s deal with each situation individually. Working a job is a basic economic contract. Put another way, it involves a will buyer (the employer) and a willing seller (individual who supplies his labor). Only when the two parties come to a mutually agreed upon price – i.e. wage – will employment begin. Very few individuals in America, therefore, would likely work for $1 an hour.

Low wages do indeed help businesses. But the wage levels also help individuals. For example, more people receive employment where free markets set wage levels. An article in Globe Asia reviewed minimum wage laws in the European Union. It found unemployment almost 4 percent lower in countries with no mandated minimum wage.

Finally, unions seek higher minimum wages for two reasons. First, higher wages force competitors to raise prices or change their business tactics. This often puts union-based companies on a may level playing field. Second, unions often demand higher compensation in contracts as minimum wages increase. Thus, a win-win is possible for unions here.

The preceding beliefs often have a base in socially or morally acceptable economic theory. In short, government has a responsibility to implement laws that benefit those at an economy’s lower levels. The problem with this theory is that wages represent a price; effectively, it is the price paid for a specific amount of labor. Minimum wage laws, therefore, represent a price control. Price controls are often illegal in other economic activities, but not so with the minimum wage.

Milton Friedman on the Economic Effects of Minimum Wage

Conservative Economists on a Minimum Wage

Henry Hazlitt, an American economist and philosopher, has much to say about minimum wage price controls. He writes:

“Thinking has become so emotional and so politically biased on the subject of wages that in most discussions of them the plainest principles are ignored. People who would be among the first to deny that prosperity could be brought about by artificially boosting prices…will nevertheless advocate minimum wage laws, and denounce opponents of them, without misgivings.”

This description alone overturns the three misguided beliefs mentioned earlier. In economics, attaching a moral or political bias can set serious false premises on future market actions.

A minimum wage can also result in a company paying too much labor. For example, if a job would pay $6.00 an hour but the minimum hourly wage is $7.25, the company loses $1.25 each hour for each worker paid. Milton Friedman calls this overpayment forced charity. Additionally, if a company’s goal is to make a profit for owners or other stakeholders, then forced charity essentially spends someone else’s money, namely those individuals financially invested into the business.

Economic theory also describes price in terms of benefits received for a given resource. In terms of wages, a company earns an individual’s labor as the benefit received for compensation. When a company must overpay workers due to minimum wage laws, the business will lose economic value. In order to make up for this shortcoming, a business will most likely raise prices to cover the losses on higher wages. This results in higher consumer prices, even those workers who would seemingly benefit from higher minimum wages.

Occupy Vancouver tents
Occupy Vancouver tents | Source

Living Wage vs. Minimum Wage

Confusion also exists between the terms minimum wage and living wage. A minimum wage is a price control arbitrarily set by a government. In most cases, few economic considerations exist when a government sets the minimum wage. A living wage, in contrast, is the minimum amount an individual or family needs to pay for all essential items, such as housing, clothes and food, among other necessities. Governments cannot usually set a living wage as this has several factors, chief among them regional characteristics, such as cost of living and current wages for specific jobs.

Walter E. Williams and Thomas Sowell Discuss the Minimum Wage

Minimum Wage Laws and Racial Bias

Finally, minimum wage laws are racially biased. Economists Milton Friedman and Walter E. Williams both make this assertion. Friedman writes:

“The government first provides schools in which many young people, disproportionately black, are educated so poorly that they do not have the skills that would enable them to get good wages. It then penalizes them a second time by preventing them from offering to work for low wages as a means of inducing employers to give them on-the-job training.”

Williams finds:

“In the political arena, one dumps on people who can't dump back on him. Minimum wages have their greatest unemployment impact on the least skilled worker… Who are these workers? For the most part, they are low-skilled teens or young adults, most of whom are poorly educated blacks and Latinos.”

You will hear little about these situations in the political realm. What you will hear, however, is that federally mandated wage laws would help disenfranchised minority youth. But such feel-goodism usually fails to follow up with the facts. And the facts are often painful to read about.

Resources:

Henry Hazlitt, Economics in One Lesson

Raymond and Howard Richman, “The Minimum Wage is a Racist Law”

Steve H. Hanke, “Let the Data Speak: The Truth Behind Minimum Wage Laws”

Walter E. Williams, “Politics and Minimum Wage”

Comments

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    • tsadjatko profile image

      TSAD 

      2 years ago from https:// www.consumeraffairs.com/ online/ hubpages. html

      The real minimum wage IS ZERO. Anyone who disagrees with what you said in this HP with respect to jobs and company economics respectfully needs to leave Obamaville and enter the real world.

      http://dailysignal.com/2015/10/22/seattle-hiked-th...

    • Chatkath profile image

      Kathy 

      7 years ago from California

      Well researched and informative article Oz, great job and welcome to Hub Pages! Voted up and useful.

    • jasmin50 profile image

      jasmin50 

      7 years ago from Greece

      interesting hub. I think though that minimum wage rate is in contrary with the free economy worldwise of our days.

    • ChristinS profile image

      Christin Sander 

      7 years ago from Midwest

      interesting article. I respectfully disagree with a lot of it, but it is very well written and informative.

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