Since it’s evident you’ve gone around and around with him on this point before, I think the key problem may be that your friend has many faulty premises, so focusing on directly rebutting this one line of reasoning – which is a conclusion he derives from his faulty premises – will never succeed.
He needs to have the underlaying premises that lead him to the conclusion that “duh, it’s a simple matter to just mandate everyone be paid a living wage, then people will be able to buy more, and the companies themselves will prosper even more than they do now, I [he] can’t understand why they don’t see it’s in their own self-interest to just do it, so, gosh darn, we’ll just have to force them to do it, then later they’ll thank us.”
As if he’s the only guy, or only the current modern progressive movement, has ever thought of it, it’s never been tried anywhere, but if they can just implement it then the greedy business owner’s noses will be rubbed in how well this works, and everyone will be better off.
Well, anyhow, you’ll have to find out what the key underlaying premises are, and show how they’re wrong or incomplete (often times the problem is incompleteness – leaving out a key factor causes people to reach incorrect conclusions).
Hopefully Tom will also chime in; I’d also recommend you re-post your question to the Austrian Economics sub-forum, with a link to this discussion, and Jeffrey Herbner will be more likely to see it, too.
Anyhow I’m reminded of something I heard that Rothbard wrote, in reaction to the argument that businesses pass on costs to consumers. He argued they can’t – at least not all of them. So they end up “eating” the cost of, say, regulations and mandates. Or at least much of it. BUT – and it’s the key but – this then means that many of them will fail. They’ll stop being viable and have to cut back or close shop. Your friend seems to be stuck in a sort of equilibrium mindset that the basic structure of an economy is “fixed,” so that if you change one variable, it only has the intended effects: increase wages by a lot, the capital structure remains the same, consumers demand more output, more output is produced, and living standards go up. However this would not happen, because much of the current economic structure would become unviable, plants and businesses would close, overall output would drop.
I’ve heard several times people used to say during the Great Depression that it wasn’t so bad as long as you had a job. That saying reflected the consequence of Depression-era wage-policies, starting with Hoover then redoubling under FDR (who put in place a lot of programs and legislation – including labour law – intended to keep wages up and drive them even higher). Sure, if you had the job, you would do well (enough) under such a policy. But it disemployed a lot of people. . .and thus, as a result – the unseen part became that, over time, as the years went by, even the people whose wages were artificially boosted were, in reality, worse-off than they would have been if such policies hadn’t been implemented, because the effects of an economy that was poorer overall ended up hitting them, and what was available to them.
Note also that even when Hoover & FDR implemented these “high wage” policies, they also implemented “price-support” policies. Again Hoover took measures to keep prices from falling, and FDR made them even stronger – to the point of sending people to gaol for selling below the government-mandated minimum price. FDR also destroyed perfectly good output (mostly agricultural) at a time people were going hungry (in the “for-real” sense, not the modern sense), in order to keep prices higher. Why? Because producers needed higher prices in order to maintain the wage levels at the artificially high rate. Of course, this also meant less output sold.
So my little story, in my initial post, was not a theoretical exercise: and it means people aren’t actually better off, at least on the whole, though some subsets (usually influential people or politically useful groups) are made relatively (key word there) better off at the expense of the majority (of both workers & firms). This also means that the policy-maker who implements such rackets can easily point to examples and say “see? My policy is working. Look how well x plant and y workers are doing?” – thus continuing to make this reasoning plausible to noobs (re-election, baby!), and the resulting dislocations and disemployment are blamed on some scapegoat.
(Note that not every policy-maker runs this explicitly as a racket. To take two contemporary examples, I bet that both Harry Reid and Nancy Pelosi are both simpleminded enough to be sincere believers in thinking “yeah, if only it were politically possible.” Guys like Barney Frank & Charlie Rangel otoh, aren’t too simpleminded. They’re intelligent brazen grifters).