Why is there a minimum wage?

I understand the desire to set a minimum wage; it is very desirable for someone to have a guaranteed minimum income.  It is comforting to know that no matter what job you do, at least you'll get the minimum wage.

Firstly, the minimum wage was designed to deal with the Depression Era when there was a large number of unemployed and few jobs to be had.  This program was meant solely to get people a leg up in recovery.  However, since it forced employers to spend more on labor than was necessary, it is quite possible it slowed the recovery down.

Much like all private sector economics, the law of supply and demand will drive wages in the correct direction.  So, let's take a look at how this would have applied to the Depression Era situation.

For arguments sake we will use simple numbers for clarity.  Let's say that there are 10,000 jobs available in the private sector and 50,000 unemployed laborers seeking jobs.  The potential employer is going to set his wages based on what he believes the job is worth; in this case we will say $1.00/hour.

Now, it is the goal of any private sector business to maximize their investment and produce profits that are acceptable to their investors.  If the investors could make more money keeping their money in the bank and earning interest then they would do that.  This is why we have private investment in business, because savings interest does not exceed capital investment earnings.

So, our theoretical employer from above starts his employee search setting his wage offering at $1.00/hour.  However, he does not receive any qualified candidates for the skills he is seeking.  So, he decides that in order to attract those with the skills he desires he must raise his wage offering to $2.00/hour.  This results in the employer successfully hiring the 3 employees he needs.  The employees have agreed to the employment conditions that the employer has set forth and for the wages specified.

For 6 months the 3 employees have worked for their employer and the employer has recognized 2 of the employees as exceptionally hard workers and chose to increase their wages to $2.50/hour.  The 3rd employee is doing the job, but not doing the job to a degree that improves the productivity or profitability of the business, so his wages remain at $2.00/hour.

Now, government comes along and says that a minimum wage of $3.00/hour must be enforced.  So, now our employer has a dilemma.  His total wage costs are $7.00/hour.  He cannot justify raising the $2.00/hour employee to $3.00/hour and his business would not be able to sustain $9.00/hour in labor costs unless he raised the price of his goods.  So, in order to remain competitive with his rivals he will not raise the price of his product and instead he will let one employee go and be forced to raise the wages of the other 2 to $3.00/hour.

As you can see from this example, instead of the governments intended benefit of increasing the wages of all workers, the results were to increase wages on two of the employees and return one employee to the labor pool.

In another scenario we might see that our employer has decided to keep his 3 employees, raise their wages to $3.00/hour and raise the price of his product to compensate for the increase in labor costs.  This could cause his customers to no longer be able to afford his goods, thus causing his business to collapse.  Another possible outcome would be that his competition is able to produce the product at a sufficiently reduced cost (or is able to financially weather a loss) and will drive our employer out of business since consumers are not going to be more for a product that is of equal quality to another at a reduced price.  Both of these could result in putting 4 people back into the labor pool (employer and his 3 employees).

So, you can see how a forced wage minimum is a very bad idea.  Some other strong arguments against the minimum wage are addressed within the context of questions about the minimum wage as follows:

1. If $6.00/hour is too little, why is $7.00/hour so much better?  Why not make the minimum wage $20.00/hour?  Well, because we would massive unemployment if that happened.
2. If a minimum wage can be set by the federal government, how long will it be before they set a maximum wage?  Well, they are already punishing the achievement minded individuals with higher taxes for their higher incomes.
3. Without a minimum wage, employers would take advantage of employees.  If an individual is in need of a job and the associate income then he will be willing to endure a level of discomfort before a free individual makes the decision that the job is not worth it.  This happens every day now, why would it be any different if there were no mandated minimum wage?

This whole argument can be boiled down to the simple economic fact of "supply and demand".  When laborers are in short supply, the costs/wages for those laborers will rise, but when there is an over abundance of laborers, the costs/wages for those laborers will decrease.

All too frequently today we have a mindset that a job is an absolute right and a good paying job is an entitlement.  But, as free people, we need to take responsibility for our own action and lives and not expect a paternal government to act for us on our basic needs.