The Truth About the Minimum Wage

Scripted, animated, and produced by Steve Patterson. Special thanks to Julia Patterson and Chuck Grimmett.

People don't like to think that anyone's labor is worth less than the minimum wage. Someone might end up flipping burgers for $5.00 an hour. You might think the minimum wage is a way of paying some sort of dignity premium -- hence language like "living wage." People with such good intentions look at the direct beneficiaries of these policies, say, burger flippers now making $7.50 an hour. They pat themselves on the back. But they rarely count the invisible costs: willing human beings who never get hired in the first place.

But $5.00 an hour is not enough to live on!, they'll say. For whom? A teenager living at home with his parents? An elderly person who wants simply to stay active? A single mom with three kids? A single woman sharing an apartment with 2 roommates? Of course, not all of these people could live off of $5 an hour. But some of them could given the opportunity. Concerns about those who couldn't don't justify minimum wages even if we ignored the invisible costs of the policy, which include reduced margins to businesses that might otherwise grow (and hire more people).

In other words, if you pull take off the bottom two rungs of the income ladder, many will never climb it. That's the effect of the minimum wage.

video source from feeseminars YouTube channel
 

(see video at the bottom of transcript)

transcript:

The minimum wage is supposed to help the poorer, less skilled, and younger workers in the economy. But it doesn't. It gets them fired.

Employment happens as a result of human choices. For example: let's say some kid named Jimmy knocks on your door and wants to know if he can mow your lawn. If your lawn really needs to be mowed, you might choose to employ him for 10 bucks. If he charges 20, we might still not complain. But if he charges 50, 100, a 1000 dollars, at some point that job will not be created. Jimmy will be unemployed.

Why is this? It isn't because you are greedy, but simply because you value a 100 dollars more than that service being provided. In this case: your lawn being mowed. An employer has to believe that the value created by an employee is greater than his cost. And that is why minimum wage laws cause unemployment. It is impossible to sustain employing anyone doing work which is valued less then their wage. The higher the minimum wage, the sooner Jimmy is out of a job.

Think about it, how many jobs would be lost if entrepreneurs were forced to only hire people whoose labor they value at the 20 dollars an hour. How about 50? A 100 dollard an hour? If the minimum wage is fundamentally sound, we should be able to increase it without fear of hurting the economy. Sure some highly skilled workers wouldn't be hurt by a 100 dollar an hour minimum wage, but the rest of the workforce would be unemployed.

When employment costs increase, entrepreneurs have two choices: they can reduce the amount of people they employ, or they can raise the price of the goods they produce. Otherwise, they're in the red. This makes the minimum wage a double whammy. Even if you don't lose your job, you and everyone else in the economy will be forced to pay for more expensive goods. Now that's counter productive.

And keep in mind, who was hurt most by rising prices? It's the lower wage workers, the very people the minimum wage is trying to help.

In a free market, employment is a win - win - win situation. Employers benefit because the value created by their employees is greater than their cost. Workers benefit, not only from a wage, but they also gain work experience, which they can use to demand higher wages in the future. And society as a whole benefits from that labor being added to the total pool of economic productivity.

But the unemployment caused by the minimum wage is a lose - lose - lose. Workers are robbed of their wages and their invaluable work experience. Employers are robbed of the benefit that would have been gained by employing. And the whole economy is worse off because those unemployed workers are now unable to contribute their labor to help everyone's economic prosperity.

To learn more about sound economics, visit www.fee.org