Why the Minimum Wage Matters

I’ve been ranting today about the minimum wage, and it’s not (I hope) because I’m just some crazy person.  I care about the minimum wage because it’s a law designed to hurt the poorest people in the country.  No, I don’t mean that it’s designed with the intention of hurting these people.  But that’s what the design of it does.

Suppose I open a plant and am looking to hire a person to work in the plant.  Suppose further that I could hire one skilled (maybe unionized) worker for $14 an hour, but that I could also hire two unskilled workers for $5 an hour each, and that these two unskilled workers combined would be just as productive as the skilled worker.  I will hire the unskilled and pay them a collective $10 an hour.  (If I hire the skilled worker, I’m throwing away $4 an hour, and making my product less competitive in the market).

Now, the skilled (perhaps unionized) worker doesn’t like this very much.  So he lobbies the government to force unskilled labor to raise its price.  Maybe he forces unskilled labor to raise its price to $7.50 an hour.  Maybe he pretends it’s because “no one can live on $5.00 an hour,” and that a minimum wage law is going to protect the poor.  What happens when Congress passes the minimum wage law?  Those two unskilled workers now cost me $15 an hour.  I can save a buck by hiring the skilled worker and laying off the two unskilled workers.  (With his new bargaining power, I might pay him $14.95 an hour). And the unskilled workers that we were trying to protect?—well, they are out of a job.

Now maybe some of those unskilled workers will get jobs and make $7.50 an hour.  But that may not happen.  If their skills add less than $7.50 an hour of value to an employer, they won’t be hired.  Who does this hurt?  Mostly inner-city teens.  

Suppose that Congress passed a law saying that people couldn’t sell their cars for less than $10,000.  Now, this might cut supply and drive up prices a little, such that used cars that used to go for $9000 might be able to sell for $10,000.  But if you have a 1984 Ford Escort, you won’t be able to sell your car.  Well, minimum wage laws do the same thing.  The might help out the price of 2004 Camry, but they make the old Ford Escorts pretty much unsalable.  

A Minimum Used Car Price law might be described by legislators as “designed to help people trying to sell used cars,” but I doubt that the public would see it that way.  So why then can’t people see through the minimum wage?