Futile may be an understatement when it comes to describing minimum wage laws. These laws are not just useless. In fact, they are worse. They not only do not solve the problem of poverty, they exacerbate it.

Companies cannot exploit their employees in a free market

One argument that proponents of minimum wage laws use is that it prevents companies from exploiting their employees. Under free market capitalism, employers will compete for employees, driving the employee’s wage not too far from how much an employer will make from the employee’s work. Suppose an employer decides to pay an employee £2 an hour for work that the employee does that is worth £11 an hour. In that case, another employer will just step in and hire the employee for £3 an hour, and then another employer will do it for £4 an hour, and this will continue to occur until the wage of the employee reaches about £10 an hour. This is a massive oversimplification as to what occurs because it is difficult to estimate how much value an employee’s work provides. Nevertheless, due to competition for employees in the free market, the wages of employees will naturally be relatively close to how much value they produce for the company.

In the UK, the minimum wage is £11.44 an hour. The problem, however, is that some people do not produce work worth £11.44 an hour. No sane employer will pay £11.44 to someone who is making them £11 an hour. But, what about a scenario where an individual is producing £14 an hour for a company and only getting paid £5 an hour? Don’t minimum wage laws help here? As was stated previously, in this case, competition within the free market will cause the wage of the employee to be driven up to a sufficient amount anyway, so there is no need for minimum wage laws.

All minimum wage laws do is cause unemployment

One of the fundamental principles of economics is that at higher prices, demand declines and supply increases. So, when the price for labour is artificially kept higher than it would be in a free market, employers will hire less. At the same time, more people will want to work. Retirees may decide to go back to work because with the higher wages that they would receive, they may be able to afford a nice holiday to Paris with the grandkids.

The correlation between minimum wage laws and unemployment can be seen in countries where minimum wage laws do not exist, such as Singapore, Switzerland, and Iceland. The unemployment rate in these countries are 2.2%, 2.4%, and 2.6%, respectively. These are also some of the wealthiest nations in the world with their citizens having extremely high living standards. It may be significant to point out that all of these countries have strong labour unions. However, whether labour unions actually have a positive contribution to the economy or if they cause the same negative effects as minimum wage laws is a debate for another article.

In 1994, David Card and Alan Krueger studied the fast food industry in New Jersey and Pennsylvania after the minimum wage was increased only in New Jersey and came to the conclusion that minimum wage increases have no effect on unemployment. The reason I bring this study up is because proponents of minimum wage use it to prove that minimum wage does not increase unemployment. However, this study has several flaws. One of the flaws with this study is that the economists studied the fast-food industry only weeks before the minimum wage was increased in New Jersey. The law mandating this increase was actually enacted 2 years prior, so the fast-food chains had 2 years to prepare for the policy change. This study also only focused on fast-food chains and not on the economy as a whole. There are also many studies that have shown that minimum wage laws do increase unemployment, such as when the U.S. federal minimum wage was extended to Puerto Rico in the 1970s. These opposing conclusions highlight that studying the real-world effects of minimum wage laws is challenging due to the many factors that can influence unemployment.

Another issue with minimum wage laws is that it prevents homeless individuals from getting out of their situation. No one would hire a homeless person for £11.44 an hour. But they may do it for £7 an hour for some extremely menial task. The homeless person would be in a better situation earning £7 an hour instead of being unemployed and sleeping on the streets (assuming they make less than £7 an hour begging). If they do, in fact, make more than £7 an hour begging, then they will just decide to not take the job. If they do take the job, they can slowly rise up the ranks to a wage that can provide them with a decent standard of living. Another group of people who are severely affected by minimum wage laws are teenagers or people just starting their careers. For these individuals, the most valuable aspect of the job isn’t the salary, but the experience and learning opportunities it provides.

Government policies that keep prices of goods from reaching the price they would be under a free market always lead to issues. This can be seen in rent control, where the price of rent is kept artificially low, causing a decrease in supply and an increase in demand. Labour, after all, is a good, it is the service that an individual provides. Wage is just another word for the price of this labour. Why, then, would price controls on wages have any different effects than price controls on rent or on bread?

From a moral standpoint, how much should an employer pay their workers?

It is usually not morally wrong for an employer to pay their employee £7 an hour. Why? Well, the only people who would take the job are obviously people who have no alternatives. The employer in this scenario has provided the individual with a better alternative than the individual would otherwise have had. Also, in this situation, the employee is most likely doing work that is worth about £8-9 an hour. If the employee is doing work worth £15 an hour, it would not be too hard for the employee to ask for a pay rise or get a job elsewhere. Paying an employee significantly less than the amount that they produce is too risky for a company as if the employee gets a job elsewhere, the company has to incur the costs of hiring a new worker. So, is it morally wrong to pay an employee £7 an hour if their service is worth £8-9 an hour?

A scenario where it would be unethical to underpay employees is if employers have decided to collude to keep prices down. This is justifiable against the law. However, even if it wasn’t against the law, this is an unlikely occurrence as each company has a massive incentive to break the agreement in order to attract the best talent.

Conclusion

A thriving economy is best achieved through minimal government intervention, allowing the forces of competition and the free market to operate freely. Government policies should focus on protecting fair competition rather than imposing price controls, such as minimum wage laws, which can lead to unintended negative consequences. Fostering a competitive business environment is what leads to the prosperity and wealth of a nation.