I would like to start out this post with a quote from Henry Hazlitt. This is a quote from his book “Economics in One Lesson”. I highly recommend this book.
“….the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
This lesson is likely the single most important lesson in economics. Many modern economists only think of the immediate effects an act or policy will have. Seldom do they look at the long term effects. Likewise, modern economists only look at the consequences of an act or policy for one group instead of all groups.
For that reason they tend to over look a lot of things. Minimum wage laws not only can contribute to an increase in prices but also, they can contribute to unemployment.
One of the first things that happens when a law is passed that everyone must be paid at least $8 an hour, is any one who is not worth $8 an hour to an employer will not be employed at all. As Henry Hazlitt states, “You cannot make a man worth a given amount by making it illegal for anyone to offer him anything less. You merely deprive him of the right to earn the amount his abilities and situation would permit him to earn, while you deprive the community even of the moderate services that he is capable of rendering. In brief, for a low wage you substitute unemployment.”
There is one exception: what if a group of workers is receiving a wage actually below its market worth? This is a very rare case and is easily remedied by negotiation. If the employer doesn’t agree with your terms you have the choice to walk away (at a loss of an employee for the employer) and seek employment elsewhere. It would have much less potential harm to an economy than if a minimum wage law was enacted.
Now you may be thinking, couldn’t the employer just raise the price of his products or services to compensate for the loss?
Now assuming that the government has not enacted a price control (in which case the only choice would be to go out of business), lets look at the consequences of making this choice.
This change is not easy to make. In order to increase the price of one’s product or service the employer must sacrifice a loss of business. Either consumers will buy less of that product or service or they will find a substitute. Either way, the company will suffer a loss which may lead to unemployment or even perhaps going out of business.
On the other hand, if prices of the product were not increased, producers in the industry would have to either reduce production (which reduces income) and/or fire employees, increasing unemployment.
To answer those who may be saying, “Very well; if it is true that the X industry cannot exist except by paying starvation wages, then it will be just as well if the minimum wage puts it out of existence altogether.”
But this statement overlooks the realities. First off, consumers will suffer a loss of that product. Secondly, you are merely saying it’s better off that the workers are not employed at all. Finally, it ignores the fact that as bad as the wages were, they were the best among all alternatives that seemed open to workers in that industry; otherwise the workers would have gone into another.
If the X industry is driven out of business, then workers previously employed in that industry will be forced to turn to alternative courses that seemed less attractive in the first place. The competition for jobs will drive down the pay offered to them even in alternative occupations.
A good employer in a free market will make every way possible to pay their employees the most and sell their valuable products or services for the least and at the same time make a profit. If the government doesn’t get involved the free market will provide an increase in jobs and products.
Minimum wage laws only distort the free market and causes loss of business and increased unemployment.
There is therefore no escape from the conclusion that minimum wage laws will increase unemployment.