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President Obama seems committed to forcing the minimum wage up through federal intervention. If he succeeds, it will only damage the economy further, resulting in higher unemployment and less growth. Here are four reasons a minimum wage is a bad idea.
1. It Restricts Individuals’ Fundamental Right to Work
Individuals are autonomous beings, capable of making decisions for themselves. This includes the ability to make a personal judgment about the value of one’s time and ability. If an individual wishes to sell his labor for a certain price, then he should not be restricted from doing so by the state. A minimum wage is, in effect, the government saying it can place an appropriate value on an individual, but an individual cannot value himself, which is an absurdity since the individual, who knows himself better than the state ever could, has a better grasp of the value of his own labor.
At the most basic level, people should have their right to choice maximized, not circumscribed by arbitrary government impositions. When the state denies individuals the right to choose to work for low wages, it fails in its duty of protection, taking from individuals the right to work while giving them nothing in return other than the chimerical gift of a decent wage, should they ever be able to find a job. Clearly, the minimum wage is an assault on the right to free choice.
2. It Denies Individuals the Dignity of Employment
The ability to provide for oneself, to not be dependent on handouts, either from the state in the form of welfare or from citizens’ charity, provides individuals with a sense of psychological fulfillment. Having a job is a key to many people’s self-worth, and most capitalism-based societies place great store in an individual’s employment. Because the minimum wage denies some people the right to work, it necessarily leaves some people unable to gain that sense of fulfillment.
When people are unemployed for long stretches of time, they often become discouraged, leaving the workforce entirely. When this happens in communities, people often lose understanding of work entirely. This has occurred in parts of the United States, for example, where a cycle of poverty created by a lack of job opportunities has generated a culture of dependence on the state for welfare handouts. This occurrence, particularly in inner cities has a seriously corrosive effect on society. People who do not work and are not motivated to work have no buy-in with society. This results in crime and social disorder.
Furthermore, the minimum wage harms new entrants to the workforce who do not have work experience and thus may be willing to work for less than the prevailing rate. This was once prevalent in many countries, often taking the form of apprenticeship systems. When a minimum wage is enforced, it becomes more difficult for young and inexperienced workers to find employment, as they are comparatively less desirable than more experienced workers who could be employed for the same wage. The result is that young people do not have the opportunity to develop their human capital for the future, permanently disadvantaging them in the workforce. The minimum wage takes workers’ dignity and denies them valuable development for the future.
3. It Damages the Economy
Politicians have transformed the minimum wage into an indicator of social development. Governments often cite their raising of the minimum wage as an example of their commitment to fostering social justice and equality. This is all nonsense. The minimum wage is nothing more than a useful, simple tool that politicians can exploit without addressing underlying social and economic ills in society.
In times of economic expansion wages are generally rising as new businesses are formed and existing firms take on more capacity and workers. During such times, raising the minimum wage has no effect other than being a useful political move. In times of economic contraction, firms close and lay off workers and unemployment rates rise. In such times, the minimum wage hampers the market from clearing, keeping more people out of work than necessary. For markets to function efficiently, wages must be allowed to fluctuate freely, equilibrating with demand for labor and reflecting the macroeconomic situation. Minimum wages tend to lock in wages at pre-recession levels making countries less competitive and less quick to recover when economic downturns occur.
Furthermore, minimum wages can often make countries unattractive for businesses to invest in, as the cost of hiring workers can serve as a serious disincentive. For this reason, businesses tend to locate in countries with the joint properties of minimal minimum wage laws and high economic and technological development, such as Germany or the United States. In order to stay competitive, to bolster economic dynamism and gain global competitiveness, countries should treat labor like the commodity it is and allow the labor market to self-correct, not institute minimum wage laws that will cause harmful frictions.
4. The Free Market Already Tends to Treat Workers Fairly
In the absence of a minimum wage the free market will not tend toward the exploitation of workers. Rather, wages will reflect the economic situation of a country, guaranteeing that employment will be at the highest possible rate, and not be hampered by an artificial minimum. Some incomes may fall, but overall employment will rise, increasing the general prosperity of the country.
Employers understand that high pay promotes hard work. Businesses will not simply slash wages in the absence of a minimum wage, but will rather compete with one another to coax the best and most dedicated workers into their employ. This extends even into the lowest and least-skilled lines of work, as although workers may be largely interchangeable in terms of skill, they are distinct in their level of dedication and honesty. There is thus a premium at all levels of a business to hire workers at competitive wages.
Furthermore, employers also take into account that there is a social safety net in virtually every Western country that prevents unemployed workers from starving or losing the barest standard of living. For this reason, wages can never fall below the level of welfare payments, as individuals will necessarily withhold their labor if they can receive the same or better benefit from not working at all than from being employed. Clearly, businesses will seek to employ the best workers and will thus offer competitive wages.
For all these reasons, a free market for labor represents the most just, economically beneficial system to operate under.