Statists love to flaunt their ostensible compassion for the masses. This is the very nature of the welfare state. Many times these welfare policies are accepted by the masses and lauded for their charity and concern for the poor, the impoverished, and the destitute seemingly without any further research done by those the policies are inflicted upon. The reality of the matter is that the welfare state achieves in exacerbating the very problems that they’re trying to remedy. One of these policies is minimum wage law.
The argument for minimum wage is that due to rising prices (inflation) and an increased standard of living in general, workers need to be compensated via higher pay for fear that they will sink into poverty otherwise. But what is passed off as being in the best interest of the worker is merely a disguised detriment to said worker. Moreover, employers are hurt by this arguably more so than employees.
As was the case recently in American Samoa, introduction of minimum wage laws devastated the local tuna fish processing plant and has forced Chicken of the Sea (the owner of the plant) to reduce its workforce by 60% this year. Samoan workers who could previously provide for their families now find themselves run out of work simply because it is now currently illegal to employ them at their previous wage rate. The obvious result of this is the subjecting of hundreds of Samoans to a decreased standard of living and potentially even poverty. Unemployment is the chief consequence of minimum wage laws.
But the entrepreneurs are also hindered by minimum wage laws and, in turn, economic development in general is stifled and distorted. We can see that this is true based on Chicken of the Sea’s decision to decrease its workforce, thus lowering its production capability and potentially not meeting the demand of its consumers.
In the case of start-up businesses, these aspiring entrepreneurs have extremely limited capital. For example, suppose Business X has $2000 a month to spend on new hires and they project they have the capacity and the demand to hire two new employees. In an un-intervened economy absent of minimum wage, Business X might agree to higher two eligible candidates for the jobs, one at $1200/month, one at $800/month. But when subjected to a minimum wage law of, say, $1500/month the result is different. Minimum wage dictates that they will only be able to hire one person, concluding that one of those prospective employees misses out on a job opportunity or maybe is unemployed totally. All of this despite there being a demand for his/her services.
Some interventionists may like to tout “Oh, well that business has money left over from their new hire so they can spend it on other things like a computer or uniforms, etc.,” a la an obvious perversion of Henry Hazlitt’s Broken Window Fallacy (which I have heard numerous times before). Unfortunately, that money left over might have been put to better use had the entrepreneur been able to hire another employee, thus increasing his production capabilities, thus meeting the demand of his consumers, thus fulfilling the wants and needs of the community at large. Central planners have no way of knowing “what is best” for anyone; consumer, entrepreneur, etc. So it is a moot point to even mention such things.
To conclude, people too often forget that labor is a scarce resource; just like wood, steel, water, and a myriad of commodities and services. There’s only so much to go around. As I’ve mentioned in an earlier post, the nature of price controls (of which minimum wage is a form) leads to one of two things: shortages or unemployment. In the example I demonstrated above, the shortage is unemployment. There is a demand for labor (and inversely a demand for wages), but laws restrict being able to hire those that may accept being paid at a lower rate.
Ironically, the Mises Institute has a daily article by Christopher Westley concerning the very nature of labor controls and how they have affected the US manufacturing sector. Check it out.
The preceding article was originally published on the now-defunct http://www.anti-state.ca in 2011. It is being re-published here to help re-inspire and reinvigorate the cause of liberty.