The Minimum Wage

Funny how I go super in-depth about subjective valuation when I’m mainly going to focus on the monetary aspects of it (as people generally do when they think about wealth) in this post, but there was a point to be made. I’ll repeat the basic argument over again and tie it with the minimum wage  now.

Suppose there are two people, David with an apple and Helen with an orange. If the two decide to exchange their respective fruits, both will benefit. David will decide to exchange only if he subjectively values the orange over the apple; likewise, Helen will decide to exchange only if she subjectively values the apple over the orange. Through heterogeneous subjective valuation and peaceful cooperation, an exchange is mutually beneficial: Helen and David are both wealthier as a result.

Therefore, any law created by government that stops this exchange from occurring necessarily makes the two poorer: they will be less wealthy than they would have been had the exchange took place. Likewise, a worker deciding to work for a wage for an entrepreneur is also making a mutually beneficial exchange. A worker will choose to work only if he values the utility of the wage over the disutility of the work. The entrepreneur will choose to hire only if he values the utility of the worker’s work over the disutility of paying the wage.

As said before, any law that stops a mutually beneficial exchange from taking place necessarily makes the two actors less wealthy. This is why the minimum wage should be viewed not as a floor holding wages up but rather as a bar needed to be jumped over. Suppose the minimum wage is $7.00. If Mark is a worker who only produces $6.00, he cannot find a job. Any entrepreneur that hires must either incur losses of $1.00 per hour or choose not to hire Mark. In essence, an entrepreneur must be willing to donate to charity. Because an exchange has not taken place, both Mark and the entrepreneur are less wealthy. In addition, the consumer is less wealthy because he cannot benefit from Mark’s work.

To say that the minimum wage is a floor pushing up wages and then asking for a lower minimum wage for teens and the mentally challenged is completely hypocritical. This acknowledges that the minimum wage is a bar to be jumped over. This logic implies that the teen generally cannot produce as much as the original minimum wage. If he was to be hired for less than he produced, the hirer would undeniably be giving to charity and incurring losses.

As an extra example of the common sense regarding the minimum wage and the associated unemployment would be an extreme minimum wage. For example, consider a minimum wage of $100.00. Under such conditions, there would be an extremely large section of the population unemployed because of their inability to contribute $100.00 an hour. A smaller minimum wage would simply unemploy to a smaller extent.

Ethical/practical counter-arguments:

1) Some critics would respond to this by saying that no person should have to work for less than 7 dollars an hour (similar to the argument made about the situation of the desperate man paying 400 dollars for a glass of water). “It is simply impossible to live with such wages.” However, those people should note that in the situation I am describing, either the person who can only “produce” $6.00 works for a wage of 6.00 or less or does not work at all. Essentially, if there is no minimum wage, then this person can earn $6.00/hr, but if there is a minimum wage he will be unemployed and earn $0.00/hr. So I would ask those who made such an argument: Is it harder to live off of $6.00/hr or $0.00/hr? The minimum wage basically does not allow humans to make choices they normally would make. The plain fact that if you eliminated the minimum wage, and an unemployed person chose to work for $6.00/hr rather than being unemployed proves that they value their situation under the $6.00/hr over the situation they previously had. So why not let them make such a choice?

2) Another line of argument would follow: well, we can just put those individuals unemployed under the minimum wage on welfare. Although I am not a proponent of welfare, I won’t argue against it here because it is irrelevant for this discussion. Even if we think welfare is good, it is not an argument for the minimum wage. This is because we could eliminate the minimum wage and still give out welfare. Instead of saying (for example), that everyone unemployed because of a $x minimum wage receives a certain amount of welfare, we could say that people earning under $x dollars receives that same amount of welfare (or perhaps less than that if we want to simply make it so that their total income (wages + welfare) equals the $x of the earlier minimum wage).

3) Others might argue: wouldn’t the extra employment of individuals caused by the elimination of the minimum wage cause a decrease in wages for everybody? I would half-agree and half-disagree (this answer would only be able to found empirically but wouldn’t be completely provable just because of all the other variables that could be taken account for). Additional competition of workers would obviously decrease wages, but by eliminating the minimum wage, it would decrease a regulation that hinders small businesses, and would increase competition of new businesses as well. In a completely free market, wages tend towards marginal revenue product (MRP; that amount which the workers contribute) because firms that pay less than the MRP are earning profits, and this profit incentivizes new businesses. Regulations such as the minimum wage hinder business competition by making it tougher to start a new business, and therefore hinder this process as well. In addition, it should be noted that new opportunities to hire people with the elimination of an $x minimum wage does not necessarily mean that the already employed have to receive lower wages. The fact that both the business owner and the new employee have to benefit from such exchanges proves that, because the business owner would only hire someone for, let’s say, $3.00/hr if that person actually contributed at least $3.00/hr. This exchange has no effect on other exchanges with workers that the employer is already making.

Sorry if it was long! I’ll probably make shorter posts from now on.

tl;dr : Minimum wage of $x dollars causes unemployment because those contributing less than $x dollars cannot be employed unless the hirer is giving to charity.

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Posted on October 30, 2011, in Economics, Ethics and tagged , , . Bookmark the permalink. 2 Comments.

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