Minimum wage laws: a real solution, or mere demagoguery?

Since the late 19th century, minimum wage laws started to be implemented in many
territories all around the globe, so that nowadays these sorts of regulations are present in most
countries. The promoters of such policies argue that these restrictions on the pricing of labor
would improve the conditions of the working class by forcing employers to pay each worker a
minimum amount that could guarantee “a dignified way of life”. Very often, politicians attract
the attention of low income voters by promising them to raise the minimum wage, so that the
families that are struggling the most can rise above the level of subsistence they currently live in.
Even though the goal that is being pursued is very noble, a very basic knowledge of market
dynamics will lead any honest observer to the conclusion that such interventions in the labor
market will produce an increase in the number of job applicants, as well as a shortage in the
number of jobs offered and therefore a rise over time in the unemployment rate or alternatively a
reduction in the amount of hours for which workers are hired. That is why when dealing with
these sorts of issues, one must never forget the law of unintended consequences, since the people
we attempt to help may be harmed the most by an unwary intervention of the market.

A prominent Spanish academic, Dr. Miguel Anxo Bastos, has argued very effectively in
my opinion that minimum wage laws are “the main cause of unemployment in modern
societies”, and he uses an example to illustrate this point: let’s say that I want to build a wall in
my house and for this purpose I have two alternatives: I can either hire a very experienced
bricklayer that will charge me 100 for the job, or I can hire two novice young workers that will
charge me 45 each to get the job done. Since the latter are inexperienced and perhaps not as
industrious as the former, I would need to hire two of them in order to get the wall built in the
same amount of time as with the experienced bricklayer. However, since the first option would
cost me 100 and the second option would cost me 90, I would go with the second option and hire
the two young and inexperienced workers. However, the more experienced worker, perhaps
older and more politically active, manifests to the younger workers that I am “abusing their
situation” and I am not paying a fair price for their work. Then, he lobbies the government to
pass a minimum wage law so that each worker has to be paid 55 as a minimum for such a job.
Finally, with the support of the enthusiastic young workers that believe this legislation will help
them earn more money, the regulation gets instituted, making the price for building the wall with
the two young workers 110 instead of 90. In this new scenario, building the wall with the
experienced bricklayer is cheaper than building it with the two inexperienced workers, so the
logical thing to do is to hire the one that charges me 100 leaving the other two workers without
employment.

Even though through this theoretical example, the consequences of minimum wage laws
seem very clear, a fair assessment of the empirical evidence is required in order to evaluate the
validity of the assertion that minimum wage laws produce a negative outcome on employment.
Dr. Thomas Sowell, a renowned American economist, does so in his books, pointing to the
decade after the passage of the federal minimum wage law in the United States, the Fair Labor
Standards Act of 1938. During that era, the wartime inflation had rendered the minimum wage
regulations completely ineffective since, due to the increasing prices, the specified minimum
wage rate was well below the equilibrium market price that unskilled and inexperienced workers
were already being paid. This set of circumstances makes the perfect case study to evaluate how
the unemployment rate had evolved from the years where the minimum wage provisions had
basically been repealed by inflation to the later years where the minimum wage rate was
successively raised in different occasions in order to make up for the overall increase in prices.
Sowell states in his book Discrimination and Disparities: “As of 1948, during this period of no
effective minimum wage law, the unemployment rates of both black and white teenagers were
just a fraction of what they would become in later years, as minimum wage rates began rising in
the 1950s to catch up, and then keep up, with inflation in later years.” He points to the data on
unemployment among black teenagers in the following years: “From 1971 through 1994 the
unemployment rate among black 16- and 17-year-old males never fell below 30 percent and
exceeded 40 percent in nine of those years, while 50 percent was exceeded twice.” Then from
1995 through 2009, the unemployment rate for 16-19-year-old males ranged from a low of 23.8
percent to a high of 52.2 percent.

Also, economists Jonathan Meer and Jeremy West do an extensive review of previous
literature on minimum wages and conduct a new investigation on the matter in their paper
Effects of the Minimum Wage on Employment Dynamics, in which they state: “we find that the
minimum wage reduces job growth over a period of several years.” They argue that a hike in the
minimum wage rate does not necessarily immediately increase the unemployment rate; instead, it
reduces the number of jobs created over a long period of time. Some of the reasons they point for
the small effect on job destruction is “For employers, the non-trivial fixed cost associated with
hiring a new employee (e.g. screening, interviewing, training) likely encourages reductions in
hiring rather than increased layoffs”.

Another report from the Bank of Spain in 2021 showed some of the detrimental effects
of the minimum wage hike passed in Spain in the year 2019: “It turns out that, following the
increase, the employment of low-wage workers was increased grew more slowly. Alternative
exercises are carried out focusing on the impact on the workers targeted by the reform. These
suggest a larger adverse impact on the job losses of elder workers and a sharper reduction in
hours worked and in job creation for younger workers”. It stands to reason that, even though the
unemployment rate may stay the same, the amount of hours for which employers are able to hire
workers will be reduced by a hike in the minimum wage rate due to an increased cost in the price
of labor.

It is remarkable how still many political commentators and even reputable economists
dispute findings as the aforementioned, arguing that minimum wages may prevent low income
families from falling below the poverty line. However, even that argument is not so clear; a
working paper from David Neumark and William Wascher called Do Minimum Wages Fight
Poverty? finds that “over a one-to-two year period, minimum wages increase both the probability
that poor families escape poverty and the probability that previously non-poor families fall into
poverty. The estimated increase in the number of non-poor families that fall into poverty is larger
than the estimated increase in the number of poor families that escape poverty”. The authors add,
“The evidence indicates that in the wake of minimum wage increases, some families gain and
others lose. On net, the various tradeoffs created by minimum wage increases more closely
resemble income redistribution among low-income families than income redistribution from
high- to low-income families.”
 In any case, none of the defenders of the minimum wage laws can dispute the fact that, if
the government were to impose a minimum wage of 100000 $ a year, given that a social
insurrection does not ensue that would immediately cause the government to retract, little to no
businesses would survive to such a regulation, leaving millions of people on the streets.

The economic science is quite clear with regards to the consequences of imposing price
floors for certain commodities (such as labor), and even when in some specific circumstances a
hike in the minimum wage rate may not produce an immediate increase in the unemployment
rate, certainly there are detrimental effects on employment if you analyze the market with a
dynamic approach. Perhaps some people may see their income increased thanks to the minimum
wage, but certainly, there will remain many workers that are unable to find a job because of that
same regulation. This brings us to the moral argument that sits at the basis of this debate. Should
the government be entitled to benefit some citizens at the expense of others? Who can decide
whether the rise in the income of one individual is more important than the employment of
another? More so, should the government be entitled to forbid citizens to voluntarily accept a job
offer because some bureaucrat believes it does not allow for a “dignified way of life”? Who other
than the person looking for a job is entitled to make such a judgement? As far as I am concerned
this is far beyond any reasonable scope of governmental action and therefore, we should work to
change the social perception of the consequences of such regulations so that demagogues stop
manipulating voters into supporting laws that ultimately harm them and harm society at large.