The Trouble With the Minimum Wage…

Opponents of the minimum wage tend to focus their attacks on the idea that it causes unemployment by forcing employers to discriminate against employees whose working abilities justify a wage less than the legal minimum:

Whether or not increases in the minimum wage (or minimum wage laws more generally) actually increase unemployment is a hotly-debated subject. Krueger and Card (1992) found that to not be the case; more recent meta-analyses of the academic literature such as Neumark and Wascher (2006) have found it to be true, but only to a small extent.

I want to come at this from a different angle. My intuition is that the minimum wage — even if it does not lead to decreased employment — is not an effective means to a fair wage level. This is because it is a price control set by the government, and as Hayek and Kirzner noted, the government has no scientific way to determine what an appropriate price level is for a good or service. Only a negotiation process between the employer and employees can organically determine such a thing. Moreover, as government is often bought out by large corporate interests, it is often in no position to fight for a fair share for workers. The notion that government dominated by corporate interests should set the minimum wage puts the fox in charge of the henhouse.

The empirical evidence seems to tally with my intuitions. Defenders of the minimum wage must confront the basic failure of minimum wage laws to secure the working class a fair share of the pie. Since the Federal minimum wage laws were introduced in the 1930s, wages and salaries as a percentage of GDP have gone on a general downward trend:

WASCUR:GDP

And the minimum wage has stagnated, even as productivity has risen:

min-wage1-fig2-2012-03

If the minimum wage is not meeting its aims, why do we continue to persist with it? There are other possible approaches.

Repealing minimum wage laws may be a better bet. Let the market negotiation process deal with wage levels. Accept that government has no scientific means to determine an appropriate wage level throughout the economy. Then treat any overhanging issues of poverty and living costs entirely separately, perhaps with a basic income guarantee as proposed by Milton Friedman and embraced by economists from across the political spectrum from Friedrich Hayek on the libertarian right to Lord Skidelsky on the Keynesian left. Such a scheme combined with a repeal of minimum wage laws would free labour markets from unnecessary price fixing, while still addressing the issues of poverty and unequal access to capital by providing citizens with a basic income to spend or invest.