The economics behind the issues: Minimum wage laws

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President Obama’s recent State of the Union address has Kentuckians once again discussing an economic issue as old as supply and demand curves themselves: minimum wage laws.

Kentucky is one of 32 states that has not established a minimum wage above that of the federally mandated minimum wage of $7.25 per hour. And that’s a very good thing for low-skilled workers, the class of Kentuckians most harmed by a minimum wage.

But if minimum wage laws mandate that employers pay a minimum fee for their employees’ labor, how could such a rule possibly hurt low-skilled workers?

The answer becomes clear when we examine the flip-side of minimum wage laws. True, these sorts of laws force employers to pay a minimum fee if they want to utilize the fruits of their employees’ labor. But these laws also prohibit workers from accepting a job they deem worth their time and efforts if the pay is below an arbitrary level determined by the state. For low-skilled workers who don’t have the ability to add more than $7.25 per hour to an employer’s bottom line, this government mandate results in their unemployment.

Low-skilled workers, like teenagers and others just entering the job market, may not have the technical expertise to compete with veteran laborers, but they do have one competitive advantage: the willingness to work for less than their more highly skilled counterparts. Minimum wage laws destroy this one key advantage for the low-skilled worker.

And this is why the minimum wage law is one of the cruelest in the land.

To illustrate this point, Walter Block, professor of economics at Loyola University New Orleans, often utilizes a biology analogy by discussing the evolutionary advantage of the porcupine:

“[T]here are certain animals that are weak compared to others. For example, the porcupine is defenseless except for its quills, the deer vulnerable except for its speed.

In economics there are also people who are relatively weak. The disabled, the young, minorities, the untrained—all are weak economic actors. But like the weak animals in biology, they have a compensating advantage: the ability to work for lower wages. When the government takes this ability away from them by forcing up pay scales, it is as if the porcupine were shorn of its quills. The result is unemployment, which creates desperate loneliness, isolation, and dependency.”

Just as a government-mandated price floor for a good like gasoline will result in many consumers choosing to forego the purchase of any gasoline, the minimum wage results in many employers choosing to forego the purchase of unskilled labor. This is especially true in a state like Kentucky which has one of the lowest costs-of-living and highest purchasing power for each dollar spent on labor in the nation. This makes each hike in the minimum wage that much more costly to employers.

Still, new-ish arguments have been made that the unskilled labor market is in fact not a competitive market, and so the normal supply and demand arguments do not apply. We’ll address these arguments in a future blog.