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Repeal the Minimum Wage: A Rallying Point

Karl T. Muth - 29th January 2014
minimum wage, price floor, microeconomics, unemployment, recession, poverty

Karl Muth explores the history of the minimum wage and offers an argument in support of its repeal.

People are always looking for so-called coalition issues. Whether you’re in a pub near Westminster in London or in one of the trendy restaurants five minutes from K Street in Washington, coalition is the word. Well, in the United States and the United Kingdom, there is one thing that conservatives and liberals should be able to agree upon: Repealing the minimum wage. It is time for this failed experiment in artificial price floors for the cost of labour, which disadvantages minorities and young people most-affected by the recent recession, to end.

In my economics courses, like many professors who teach courses that touch on topics in labour economics, I teach the history of the minimum wage. The history of the minimum wage, most economics students will recall, begins in New Zealand, which adopted a minimum wage nationally about a century ago. Since then, a vast number of countries have adopted a minimum wage of some sort, with either regional (America) or national (UK) minimums applying. Some workers, like domestic workers or household maids may be exempted from the wage rules (Hong Kong, for instance), but most workers in the economy are generally subject to this price floor.

What is a minimum wage? A minimum wage is a price floor for labour. If you want to buy labour, you have to pay a certain amount, normally per day or per hour. Of course, this means some people are overpaid. The key concept, which many students fail to absorb in my experience, is that everyone (except people who fall into tiny sliver whose marginal product of labour happens to be precisely the minimum wage) receiving the minimum wage are overpaid. The people making more than the minimum wage are generally contributing more (their marginal product of labour) to the firm than the minimum wage and, predictably and correctly, earn marginal wages similar to their marginal products of labour. However, people who only contribute a dollar or two an hour of value are still paid the minimum wage – they are overpaid.

For “liberals” (not in the international or continental sense, but in the British and American sense), the concerns include that the minimum wage raises unemployment, that it particularly hurts the employability of young people and ethnic minorities, and that it skews the labour market in ways that contribute to long-term unemployed who discontinue their search for work (called “discouraged workers” in America). For “conservatives,” the concerns include that the minimum wage is not only a law requiring people to be overpaid, but a law that essentially “privatises” the costs of the dole without providing any benefit to the enterprises charitably participating, along with other concerns about dependence and overly-paternal state interferism. Both are right. The minimum wage is bad policy for all of these reasons.

Oddly, the minimum wage finds support among the poor – perhaps because nobody thinks he or she will be the one whose job is eliminated by the increase in the price floor. People are willing to play a kind of unemployment Russian roulette. The golden goose, this logic suggests, can be harassed and kicked and stabbed a few more times before it actually dies. We know increases in (or the very existence of) the minimum wage essentially have no effect on poverty – we have known this for decades theoretically, but we now know this empirically (most recently we know this from an excellent study by Sabia and Burkhauser with a contemporary dataset). The argument that the minimum wage prevents or reduces poverty is simply false.

The popularity of the minimum wage depends upon the economic illiteracy of the public. Through affirmative ignorance of the basic principles of economics, American and British “liberals” can believe that the minimum wage leads to “fairer” pay for workers and conservatives can believe that the amount by which these relatively-unskilled workers are overpaid is not so significant. By this same ignorant process, poor whites (who tend to support conservative candidates in both countries) and poor non-whites (who tend to support liberal candidates in both countries) can band together, support a minimum wage, and vote themselves out of a job.

The advocates of a minimum wage often comment that it is the responsibility of the State to protect workers. I agree. And repealing minimum wage laws will protect workers (and voters) from themselves, reduce unemployment, bring worker pay in line with worker productivity, and increase equitable access (particularly for young and/or non-white workers) to the existing pool of job opportunities.