Minimum Wage Laws
Suppose that a job can be done by either three unskilled workers or two skilled workers. If the unskilled wage is $5 per hour and the skilled wage is $8 per hour, the firm will use unskilled labor and produce the output at a cost of $15. However, if we impose a minimum wage to $6 per hour, the firm will instead use two skilled workers and produce for $16 as opposed to the $18 cost of using unskilled workers. In the “official data” this shows up as a small job loss — in this case, only one job — but we see an increase in average wages to eight dollars per hour in spite of the fact that the least skilled workers are now unemployed.
I am in favor of helping the poor, but minimum wage laws — striking examples of the law of unintended consequences at work — are not the best tools to address the plight of the working class. As Carden notes, wage floors create unemployment for low-skilled workers. But earning a low wage would be better than no wage at all. Further, wage floors create deadweight losses through inefficiency, strain employer-employee relations, and foster the emergence of black markets in labor.
Wage floors are supported by people with the noblest intentions and the poorest reasoning. Proponents would do well instead to support education, skills training, and expansion of market opportunities through deregulation as better mechanisms to alleviate lower class struggles without the sting of such harmful unintended consequences.