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Minimum Wage, part 2

June 5, 2011

Cutting the income of the very poor is not the only harm done by the minimum wage.   The  minimum wage damages the social fabric of society.

  • Skills – Low skilled workers are frozen out of the job market, which prevents them from learning skills that would result in getting a higher wage.  No minimum wage will be higher than the average wage of a high skilled worker.
  • Social ties – Workers who are employed meet other people who have the skills to hold down a job.  They are able to gain contacts and network and find better jobs through friends.  They can build a support group to help one another.
  • Justice –  Under a minimum wage, the bulk of the burden of higher wages falls on people who are worse off than the beneficiaries (the unemployed).  If a democratic society votes for a politician who wants to increase the wages of the poor, the cost of that program should fall on all of society through a tax.  It is unfair to put the burden on a small group, especially a small group who is already disadvantaged.  A wage subsidy would be a more just way to increase the wages of the poor.
  • Substitutes of non-wage compensation – Workers aren’t just paid in cash, they also often get perks, such as health care.  If the minimum wage were $8, a job providing $6 an hour in cash wages and $4 an hour worth of benefits would be illegal, despite being worth more to workers.  The American health care system is set up so that health care expenditure is tax deductible for employers, but not individuals.  So, a worker that is denied employment not only has no income, but also faces health care costs about 30% higher than those with employer provided health care.  Perks will be dropped by minimum wage paying employers, even if employees would be better off with them.
  • Encourages Criminal Behavior – When people are frozen out of the formal job sector, they will look for informal alternatives.  They may work jobs that are illegal and/or dangerous, such as drug dealing, in order to make ends meet.  Even a low paying formal sector job is better than a life of crime.
  • Raises prices of goods and services poor people are likely to demand – Poor people are likely to buy goods and services made by other poor people.  They will have to pay higher prices as the higher costs of production are passed on.

Update: A video about price controls in general.

Further reading:
Government red tape keeps the poor unemployed.
Unexpected justification for minimum wage
Caplan on minimum wage literature.

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