Minimum Wage Laws Lead to More Than Unemployment

Government-mandated minimum wages are often a hot topic for debate.  Libertarians do not believe in a mandated minimum wage, as this is a violation of property rights and the freedom to associate.

Minimum wage laws prevent a contract between consenting parties.  It does not allow potential employees to work below a wage that the government has approved.  It also does not allow employers to hire employees below this wage.

Advocates of minimum wage laws or higher minimum wages will typically promote them with helping the poor as the main reason.  Whether this is actually their motivation probably varies.  But the typical reason we hear from proponents is that people cannot afford to live on such small wages.

The typical response by libertarians and some conservatives is that minimum wage laws actually end up hurting many poor people and those with fewer skills by making it more difficult to get a job.  They rightly point out that higher minimum wages typically lead to higher unemployment, with all else staying the same.

I also like to use the moral argument, as I mentioned above, that it is simply the use of government force to prevent a contract between consenting parties.

These are all valid arguments against minimum wage laws, but there is another argument that we rarely hear.  This is an argument on behalf of employers, but really it affects poorer people too.

When the government enacts a minimum wage or raises the minimum wage, it means there are fewer options for employers.  They either have to pay the higher wage, or find another way to do the work, or simply not do some of the work.

In some cases, employers turn to technology.  Maybe they can find machinery or hire robots that take the place of workers.  I have no problem with employers using technology to reduce costs when they can.  The problem is that, in some cases, the employer would have chosen to use human labor over machinery/ robots if the minimum wage hadn’t existed.  Therefore, the cost is higher than it otherwise should have been, or the performance of the machine is lower than it would have been with a human.

Sometimes an employer may just choose to forgo certain activities because of minimum wage laws.  Maybe a company wanted to expand a particular product or service, but it may not make sense if they can’t hire cheaper labor.  It could lead to products and services just not being offered in the marketplace because of the mandated minimum wage laws.

Regardless of what the employer chooses – and the employer doesn’t have to choose to hire people – it is going to lead to fewer products or increased costs.  This either makes the company less profitable, or it leads to higher prices than would have been the case.

It is impossible to detect this when you go shopping or go to a restaurant, but ultimately this hurts all consumers.  Even if all prices are just slightly higher because of this, it ultimately hurts everyone in some way.  So the unskilled worker may or may not have a job, but he is paying the higher price of certain goods.

The free market has a way to balance everything out.  When the government interferes with voluntary exchanges – including labor – it distorts markets.  We cannot always perceive the imbalances, but we can be sure they exist.

The way to raise real wages is through increased production and technology.  This means we need savings in the economy, along with capital investment.  The government can’t magically raise real wages without creating unintended consequences, most of which end up impacting the people who are supposedly being helped.

Minimum wage laws should be abolished.  It should be done for the benefit of employees, employers, and the principles of liberty.  If we want to become a richer society, which includes helping poorer people, then we need more wealth production.  This will only be done through voluntary exchanges.

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