What are the effects of minimum wage laws? Here’s a list of five bad things and a couple of good things.
1. Fewer jobs in general The Supply & Demand Model makes it clear when government fixes prices above the market clearing price, it leads to a surplus of workers. That is the same thing as a shortage of jobs. Some people with no skills are unable to find work.
2. Fewer jobs for new workers One group of potential workers who are without a job are those entering the workforce for the first time. Think of high school kids looking for the after school job. Many small businesses will avoid hiring and do the menial work themselves.
3. Fewer jobs for minorities and new immigrants Two other groups of potential unskilled workers are minorities and those coming to the US to find work (hopefully legally). Many have not had or taken the opportunity to gain skills through education. Aren’t these the last people we want to hurt?
4. Fewer incentives to improve If government intercedes in the labor market, by establishing high minimum wage levels, sometimes called “living wages”, those who are lucky enough to have such a job get false signals from the marketplace. They believe government will keep them in beans with this living wage philosophy. They don’t have the incentive to better themselves with education. They intellectually atrophy. When economic downturns arrive, they have little to lean on to survive. Price signals are good. It motivates people to action. They work to move up the economic ladder.
5. Widens income inequality While many would argue minimum wage laws promote income equality, The Biz Bucks Guy argues that eventually with less education than others, people fall back down the economic ladder. Income inequality is worsened.
1. Better pay for those who don’t lose their job Of course, for those who keep their jobs, the pay is better.
2. More innovation and technology With minimum wages higher than the market clearing price, employers will begin to innovate to eliminate as many unskilled workers as possible. A fast food restaurant will install automated ordering. Stores will introduce self-checkout lines with scanners. All this improves many people’s lives, at the expense of the unskilled workers.