The Real Consequences of Minimum Wage Legislation

Support for an increased minimum wage is a prime example of how often well-intentioned legislation has unforeseen and undesirable consequences. Support for a higher minimum wage law is justified as a means to help the poor, which in itself is a noble cause worth supporting.  Without looking into the economics of minimum wage legislation it is reasonable for one to conclude that raising the amount employers are required to pay their workers would serve to help the poor because they are the workers whose wage is the lowest. This flawed logic has lead to most people believing that at least some sort of minimum wage is necessary; causing a debate on what is a just minimum wage instead of debating if there should be any minimum wage at all. The real result of instituting minimum wage legislation is an overreach by government in the private affairs of citizens that harms everyone.

It is not uncommon for supporters of a minimum wage to label their opponents as being the enemy of the poor. However, this claim could not be farther from the truth. Increases in the minimum wage hurt the poor in two major ways; a higher cost of living and a lower demand for low-skilled labor. A 2004 review of more than 20 minimum wage studies looking at price effects found that a 10 percent increase in the U.S. minimum wage raises food prices by up to 4 percent.[1] This rise in price is especially harmful to the poor because they spend a higher percentage of their income on food than wealthier households do. A higher minimum wage also decreases the ability of businesses to hire low-skilled workers. This harms the poor because it makes less entry level jobs available, so it is more difficult for a young person from a poor household to gain skills in the workforce in order to escape poverty. This is well summarized by Nobel Prize winning economist Milton Friedman when he says, “The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills.” This legislatively forced discrimination provides yet another obstacle for the poor to overcome when trying to escape poverty.

Another attack that supporters of the minimum wage use is claiming that those who do not support an increase in the minimum wage are supporters of “big business.” This is also a ridiculous claim as big businesses such as Walmart are staunch supporters of minimum wage legislation. The reason big business supports minimum wage laws is because large businesses know that they are able to afford to pay their employees a higher wage while small businesses that also have to comply with the minimum wage laws cannot afford to pay their employees as much. The increased cost of labor causes smaller businesses to close which helps to eliminate competition for bigger businesses. In truth, supporting a raise in the minimum wage is pro big business while at the same time being destructive to small businesses.

Even going beyond economics and data, the minimum wage can be viewed as a moral issue.  Supporters of the minimum wage often claim the moral high ground and believe they are helping people by mandating what wage an individual can work for. In reality, they are the immoral ones by not allowing people to freely choose what wage to work for. Minimum wage legislation undermines personal freedom while at the same time harming the people it intends to help. To summarize, as Milton Friedman once said, “The real tragedy of minimum wage laws is that they are supported by well-meaning groups who want to reduce poverty. But the people who are hurt most by higher minimums are the most poverty stricken.”

[1] Sara Lemos, “The Effect of the Minimum Wage on Prices,” Institute for the Study of Labor (Germany), Discussion Paper no. 1072, March 2004.


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