The Minimum Wage

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    So, the typical argument against a Minimum Wage is that it would throw more lower-skilled workers out of work because their marginal revenue product becomes less than what it would cost to hire them.

    However, there are 2 common responses people will make:

    1) But if there is a large supply of low-skilled labor, then businesses will be able to exploit workers and charge extraordinary low wages, since they know they can find another employee if the person quits.

    2) Well, if they can’t get hired for the minimum wage, that’s what welfare is for.

    Not sure if this should’ve went in the general discussion or here, but I just wanted to know what would be good response to these 2 VERY COMMON objections to minimum wage abolition.


    The first objection does not even address the issue. A large supply of low skilled workers simply means a large supply of unemployed individuals if there is a minimum wage put in place. So we can have a large supply of “extraordinary low” (extraordinary compared to what?) wage earners or a large supply of unemployed individuals. Which is better? I would prefer to have a bunch of low wage earners contributing to a productive process than a bunch of unemployed individuals. Finally, giving someone a job (at any wage) is not exploitative so long as the employer is not using force.

    With regard to the second objection, welfare has its own arguments aside from the minimum wage. There are moral and economic objections against welfare. When discussing welfare, I like to ask the proponent of welfare if it is permissible for me to break into their home and steal their food if I am hungry. Further, the expropriation necessary to fund welfare (whether through taxation, debt or money creation), is destructive of wealth.


    Thanks MichaelP. That definitely makes sense in regard to the 1st objection. It actually disappears as an objection when you look at it like you said.

    Welfare does seem to be a different animal, but people will often use that trick of switching the topic or bringing in another factor to avoid dealing with the minimum wage arguments head on. Thanks again for the response.


    If I was pro-MW, I would respond to Michael’s first point by saying that if employers hire employees for extraordinarily low wages, a minimum wage will bump them up to a level closer to their respective MRPs rather than unemploying them.

    In response to that, as a anti-MW, I would ask what evidence there is that a person’s current wages and MRPs are actually such an amount that the MW would not unemploy them and would actually raise their wages instead. I’d then ask them why they’re not in favor of more business competition through lower regulations, since competition for workers drives up wages. After all, if employer A can make a $5.00 profit from hiring a specific worker (for a wage $5.00 less than his MRP), employer B would also see a profit opportunity, and hire that same worker for a $4.00 profit. And as such, wages would tend toward the MRP.

    And after all, isn’t the MW itself a regulation that reduces competition? A MW decreases the number of people a business can profitably hire. By making it harder to take advantage of low skill, low wage employees, the MW makes it more difficult to start new businesses. In his desire to raise the wages of those being “exploited”, he is instead making their “exploitation” all the more worse.

    I made two blog posts (here and here) in the past about the minimum wage, so if you’re interested in that, feel free to read. If that’s the case, I’d also encourage you to point out any mistakes I made or anything you may disagree with. I only try to look for the truth but I definitely have biases I sometimes don’t think about, so I don’t want to make false arguments.

    If they bring up the welfare argument while simultaneously arguing the MW, they are actually making an irrelevant statement. In the first link above, I state:

    “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).”


    Great analysis Bharat. I look forward to reading more posts on your blog. Excellent point on the fact that Minimum wage hurts low-skilled workers WHETHER OR NOT they are on welfare.


    I also have a question about minimum wage. I have a co-worker who is all about the “American system” and somewhat socialist, we get in arguments all the time about many issues, one of which being minimum wage. He seems to think if the minimum wage is repealed then all wages will drop across the board, not just wages that are set at minimum wage, because employee’s and employers need a bench mark to set their wages, so he says. I’ve conceded that it is possible that wages at minimum wage could drop, but that I do not see how wages that are above it would be effected. I have explained to him why minimum wage is bad, that it creates unemployment among the unskilled workers. Of course, he thinks I’m crazy, that I’m for the elites, that he has history and reality on his side, that I’m living in a fairy tell land with unicorns and leprechauns. Although, I have become somewhat immune to such ad hominem attacks it is still quite irksome to have to deal with such ignorance on a daily basis, not just from him but from others as well, of course I’m not trying to say I’m the most intelligent fellow in the world, but still.

    What are y’all’s thoughts on this?


    I’d say there’s some truth to that. It’s likely that the whole point of the minimum wage is to raise the wage of some (those in unions who aren’t unemployed by it) at the expense of others (those unemployed by it). Hopefully, someone else can explain how it eventually effects people even far higher up in wage. However, there is an effect that many don’t account for, which is that small businesses will be able to compete more easily without a minimum wage. Like any regulation, it makes it much more difficult for them to start up, and allows big businesses to lower wages because there is less competition for their laborers.

    If you want a make a moral argument (a lot of moral arguments are inextricably tied up with economics anyway), you could imagine a situation where there is no minimum wage as your starting point. Is it okay to unemploy some people just to increase some other people’s wages? Is it okay if I lobby Congress to outlaw your friend’s employment because my friend happens to be competing with him, and will have a higher wage if he is unemployed?

    I don’t know what he means by ‘benchmark.’ If he means there has to be a floor keeping up wages above the “living” wage, then I get that point (I’ll reply to that further below). If he means that employers can’t figure out what wage their worker should get without a ‘benchmark’, then I think that is a strange case to make, and the onus should be on him to explain that further.

    If he really is making the “living’ wage argument, I’ve always thought this was ludicrious. What is a living wage? Ask him for a precise definition, what is the exact amount of that wage, and how does he know what it is? Many people cite a “living” wage as their reason for supporting a minimum wage, but few rarely define it. Last time I checked, you could go to Publix (or whatever grocery store), and get bread and peanut butter for under 5 dollars. With a little more money you could probably buy a blanket and perhaps construct yourself some shelter in the woods to sleep in. Sounds like a terrible life, and not one I want to live, but you’re certainly living, aren’t you?

    Other than that, it sounds somewhat like your friend just ignores some of your points. Does he really believe there is no unemployment caused by the minimum wage? If so, go through the logic with him. If a minimum wage is above what an employer believes an employee can produce, he will fire that employee because he cannot get profits by keeping him employed. If your friend agrees with this logic, ask him why he believes not a single person produces less than the minimum wage (current or at whatever level your friend thinks they should be at).


    “1) But if there is a large supply of low-skilled labor, then businesses will be able to exploit workers and charge extraordinary low wages, since they know they can find another employee if the person quits.”

    First of all, I think, low-skilled labor is always the most abundant of all, their supply will always be the largest of them all. That is because poor, uneducated people have most incentive to create new children. The general argument applies here too: when a system is poor (low capital investment) it has to pay all attention to short-term projects. Only as it gets richer, it gets freed to engage in longer-term projects too. So, poor children are put to good use very early on, and poor families tend to have a lot of them. If this natural process is seriously distorted (by taxation rich–>poor), then the children-making slows down, and the whole society moves toward a slow self extinction by depopulation.

    These low-skilled workers will accept jobs/salaries that benefit them. They will not accept salaries below their elementary sustenance… which itself kinda sets a natural “minimal wage law”. If they can not find any jobs to sustain themselves (in the absence of MW law) that very limitation is regulating their numbers in the long run. A poor family may have 5 kids and benefit from their early labor, but will not have 10 kids because some of them could not sustain themselves… its a big self-regulatory feedback loop. The result of this mechanism is that the number of low-skilled workers increases only as much as society gets richer. In other words, poor people benefit A LOT from society getting richer because they can immediately increase their numbers. And what gift is more precious then the gift of very life??!! What do rich people get as society gets richer? One more yacht? One more airplane or a castle? That’s not much in comparison! Poor people, low-wage workers are the biggest beneficiaries of economic progress.

    Also, at this point Mises will step in to say that in capitalism there is always need for workers. If governments do not interfere, there is never enough work force. These poor, low-wage, people are still very useful and needed! They WILL be offered wages to sustain themselves, and from then on they can (if ambitious at all) learn through working and climb up slowly, and then create something, if just a little better, for their children, etc.

    Look at the example from above, poor families having lot of children… even the labor of a small child can be put to good use – a child can benefit more then what it costs, and still have a nice family and a childhood to be proud of later on!! Mises was so right, there is never enough workforce.

    MW law messes this huge complex mesh of feedback loops and information dynamics in many ways.

    Finally, and I don’t know why people often forget this – working is therapeutic. Existential struggle, trying to make ends meet for your family, having ones ego shattered by too much expectation etc etc – all this struggle is very healthy and invigorating. At the end, when a person does manage to survive against the odds and provide for a family – this is so rewarding and satisfying and something one can be truly proud of. MW messes even with this by gluing people to welfare.

    “2) Well, if they can’t get hired for the minimum wage, that’s what welfare is for.”
    Well, if they can’t live normally for being repeatedly struck on the head with a hammer each time they regain consciousness, that’s what universal health care is for.

    Wouldn’t it be more fair to at least give them a choice – either to work below MW in the hope of getting some skills and then moving on, or to live on welfare and be stuck there and rot?

    “He seems to think if the minimum wage is repealed then all wages will drop across the board, not just wages that are set at minimum wage, because employee’s and employers need a bench mark to set their wages, so he says.”

    The simple truth is that if MW is dropped, wages across the board will effectively increase simply because it’s good for the economy, and a better economy rewards across the board.

    Employers do not have the freedom to play with their wages according to MW level, as long as they have to compete for workers. If there is some sort of monopoly, a cartel, that’s a different subject. If, upon dropping MW, ALL employers in concert, like a gigantic cartel, would decrease wages then yes, wages would go down. But for that they don’t need MW.. if they can organize in such way they can do it tomorrow. That situation would be insanely unstable – a single employer could increase his wages, and the whole cartel would come crashing down as workers would flock to that guy. Every single employer could only dream that that would actually happen, and that he be the one to benefit from such tremendous stupidity of everybody else. So this will never happen.

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