Friday, April 07, 2006

Why minimum wage laws are a bad thing

Here is a brilliant but lengthy article on why minimum wage laws are problematic.

In the past, I've found that I'm able to highlight a major problem with minimum wage laws by simply going over the definition. Until they are clearly defined, most people who wish well for struggling low-paid workers would naively believe that these laws make sure that everybody gets paid a "decent" amount for their labour.

  • The common definition: The minimum wage is the minimum price (or rate of pay) an employer must give to an employee.
  • A better definition: The minimum wage is the price level (or rate of pay) below which, all employment is outlawed, banned and illegal.

Usually with this definition, people start to see how destructive a minimum wage law is. The irony is that the biggest proponents of minimum wage laws claim they are doing it for the poor Aussie battlers. They elaborate on how it can improve "jobs" for the poor.

But the only thing it can do is destroy "jobs". For example, most parents can't afford lots of money for babysitters. The job is usually pretty easy work for the employee anyway, they get to watch TV and help themselves to food. Usually the parents find some semi-responsible teenager to babysit for 4-5 hours, and they usually get paid $20-$30 cash.

Similarly, some people need cleaners or maids, but they can't afford to pay the minimum wage. There are a lot of struggling people out there who would do the job for half the price. After all, a job is only created when two willing parties agree to exchange items. One pays a wage, the other provides their labour.

Also with gardening - I live in a townhouse and a gardener comes by and mows all the lawns and nature strips in one session. I chip in $10, he is happy and I am happy too.

There are a lot of people out there who can't provide labor valuable enough to meet the minimum wage. If you are a professional, you don't have to worry. If you are a teenager, or handicapped, or elderly, or disabled - I'm sorry to say that providing your labor won't earn some of you more than $4 or $5 an hour. Thats the reality of the market.

You can either live under a system of minimum wage laws that outlaw all the jobs that you qualify for, i.e gardener babysitter, cleaner or maid.. or hope to live under a free market system where all these opportunities exist for you. Anyway, I think this analogy (via Catallaxy) sums it up well:

What if there was a minium price law for cars? Say $8,000?

What would happen to all the servicable but not very new or flashy cars that nobody is prepared to pay $8000 to own?

I suppose they would have to be junked, or just left sitting in the street or the back yard.

That is happening to people who are slow, with minor physical and mental or intellectual handicaps, and people who are untrained and lacking experience, or all of the above. And some of the most caring people around are all in favour of the minimum wage legislation that produces that outcome.