I believe the best social program is a job.

Ronald Reagan

For more than a century, a growing number of governments have established minimum wage laws, setting a baseline for workers’ compensation and prohibiting employers from offering salaries below this legally defined threshold.

While the intention behind such laws is to ensure a higher standard of living for workers and protect them from potential abuses, their practical effects yield the opposite outcome. Instead of elevating living standards and safeguarding workers from poor conditions and low pay, minimum wage laws lead to unemployment and limit job opportunities.

How do we achieve higher living standards?

Improvements in living standards don’t just happen by passing laws. Among other factors, increased productivity is a crucial requirement for improved living standards.

Studies have indicated that in countries with more productive workforces, a substantial portion of the population experiences a higher standard of living. Conversely, in less productive environments, the trend is for the majority to face lower living standards alongside a pronounced scarcity of goods and services.

This finding supports the argument that the minimum wage law is ineffective. If productivity is the key driver of improved living standards for workers, minimum wages become unnecessary for this particular goal because free-market forces naturally guide wages to their optimal level. This tendency prevents the fixation of wages below a worker’s productivity level and averts inefficient distortions.

In a less regulated, free-market economy, wage levels are dictated by the dynamics of supply and demand. This pricing mechanism often aligns with the individual productivity of each worker, ensuring that work quality meets market demands.

Let’s consider this scenario: A worker earns $1,800 per month but is actually worth more — say, $2,000 per month — and aspires to make that amount.

In this case, the worker’s wage is below its optimal point, and should prompt his bosses, if they are vigilant capitalists, to consider an increase. But if another employer, also a vigilant capitalist, values the employee’s effort more than the current wage, they can make a higher offer to secure the worker’s productivity. 

This competitive dynamic ensures that wage levels align with workers’ productivity, as there’s ultimately no incentive for an employer to maintain wages below their employee’s productivity level. Doing so only runs the risk of losing them to a higher-paying competitor.

What happens when a worker’s productivity doesn’t align with the minimum wage?

Setting a minimum wage means a worker whose value falls below that level is likely to lose their job, as it’s prohibited for the employer to offer wages below the legally mandated level. This creates two direct and interconnected side effects: unemployment and the growth of the informal market.

In essence, the minimum wage law establishes a cutoff wage. Any individual whose productivity doesn’t match the legal minimum will face unemployment.

The truth is that the law is not forcing the employer to hire, but rather to refrain from hiring any individual whose productivity does not correspond to the value established in the legislation. Rather than ensuring employment, it hinders individuals willing to accept a lower wage from securing employment.

Economist Gregory Mankiw issues an important warning about the effects of minimum wage laws: “The minimum wage increases the income of employed workers, but reduces the income of workers who cannot find employment.”

In essence, those already employed stand to gain from the law as they receive more without having to enhance their productivity. However, for individuals aspiring to enter the job market, notably young people, the economically vulnerable, and the less qualified, the consequences of the law are disastrous.

Minimum wage laws generate unemployment

Let’s consider another scenario: A worker receives a job offer with a specified monthly salary of $1,300. The offer is accepted. Subsequently, legislation is introduced, establishing the minimum wage at $1,800.

If the employer chose to hire them for $1,300, it’s because they believe the employee’s productivity aligns with that value. If a law then mandates paying more for someone deemed unworthy of the perceived fair value, the employer might terminate the employee or hurry to halt the hiring process, possibly opting for a more skilled candidate who better corresponds to the obligatory pay.

In this sense, the minimum wage law hinders those less qualified.

How minimum wage laws are exclusionary

Minimum wage laws are therefore exclusionary laws, since they exclude the less privileged and less qualified from the labor market entirely. 

Another related effect is a decrease in job supply and an increase in demand. Elevating the wage level typically leads to a rise in the demand for employment while the supply tends to decrease.

Basically, more people express willingness to work, yet fewer job vacancies are available. This happens because, with a mandated wage level, employers can no longer offer positions that require a lower level of productivity and, consequently, a salary lower than the stipulated minimum wage.

In short, less qualified individuals will have to compete for fewer positions and will be competing with more — and better-qualified — people.

How do countries with and without minimum wage laws compare?

When considering the outcome of minimum wage laws, it makes sense to look at a comparative analysis between countries that have adopted minimum wage laws (U.S., France, Brazil, Spain, Portugal, Australia, the U.K., etc.) and countries that have not, such as Austria, Denmark, Finland, Norway, Sweden, and Switzerland.

The Cato Institute conducted research showing that countries that adopted the minimum wage had higher levels of unemployment compared to those that did not adopt it. The unemployment rate among countries that adopted the minimum wage reaches nearly 12 percent. In contrast, countries that did not implement a minimum wage law saw an unemployment rate equivalent to 8 percent.

Though they’re not the be-all, end-all, these examples suggest that the wage levels of a society should be determined according to market forces, not by the strokes of a legislator’s pen. And that state interference only hinders the lives of the neediest and least qualified for the labor market, who, in the face of laws establishing a minimum wage level, must compete with more qualified individuals and for fewer available positions.

If supporters of the minimum wage do so in defense of the poorest, I can only conclude that the lower classes are very poorly represented.

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