Tuesday, July 17, 2012

How minimum-wage laws cause unemployment

Zachary Roovenback says: "Not sure how anyone can say a minimum wage level destroys jobs.  We have evidence to show that when the middle class is payed decently, the economy is strengthened."

 Let us look at a thought-experiment and perhaps this will demonstrate the proposition that enforced minimum-wage laws create a greater degree of unemployment. [It is important to know what is generally reported as "unemployment" is the percentage of persons actively looking for employment (generally within 6 months), therefore, after a person stops looking for work, they are no longer part of the reported "unemployment" statistic)]

Imagine a hypothetical where the minimum-wage is set to $50 an hour; the market prices of labor being a function of supply and demand, if we were to restrict employment opportunities to only those over $50 an hour, who would be employed? Only those persons whose labor provides more than $50 an hour of productivity to the employer; otherwise the employer loses money by employing someone at $50 when their particular labor to the business provides that business with less than $50 of productivity, therefore, business that are forced to pay a rate higher than the value of labor to the business will go out of business (and this would also increase unemployment).  Therefore, a $8 an hour minimum wage, would not actually create a situation where workers are necessarily paid more, it creates a situation, where the business will unemploy those employees whose labor to the business is worth significantly less than the minimum-wage, and have those employees that remain, would generally have to pick-up that slack.  Minimum-wage laws function to cost businesses more for some kinds of labor (those labors that provide less than the minimum-wage of productivity) than they would, under free-market conditions, therefore those costs are passed on to consumers; consumers therefore, have less money to purchase other products and services, and therefore other businesses make less profit and have less capacity to carry employment and must shed excess labor to remain profitable.

The minimum-wage benefits those workers whose labor-value is marginally close to the minimum wage, for those people, it may increase their wage, it does little to nothing for those who already are paid more than the minimum wage, and it prevents the gaining of access to employment for those who labor are worth significantly less than the minimum wage.  The principle is aptly demonstrated by Tom's $50/hour scenario, which would obviously cause massive unemployment, but the principle still remains constant across smaller minimum wage standards due to the supply/demand function.  Essentially, those whose labor is less than but marginally close to the minimum wage, get an increase at the expense of those people who the business would have employed if there were no minimum wage.

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