On the minimum wage: Part II

April 18, 2016 admin

On the minimum wage: Part II

In Part II, I argue against the minimum wage because it acts in direct opposition to one of the great achievements of classical economics. The minimum wage diminishes the ability of free decision-makers to engage in voluntary exchange, which benefits all parties.

In a free society individuals have ownership over their own time, talents, and property and each may be willing to sell what is owned if the price is right and if it is not, can decline. Market economies in which individuals make voluntary decisions (rather than coerced ones), would never agree to an exchange unless it is individually beneficial. When all parties find an exchange individually beneficial, everyone’s life is made better off as a result.

In our context, workers sell their time to an employer. A worker will generally decide to accept an offer of employment only if the wage rate offered exceeds a reservation value, which is determined by the workers preferences and estimates of the value of that time.

Likewise, an employee has value to the employer to the extent that the labor services provided by the employee generate a revenue that fully compensates the employer for the wages paid.

When neither party is forced into the employment agreement only a worker who is offered a sufficient wage will accept it and be made better off. Likewise, the employer is better off because the offer will only be made if the revenue potential of an employee exceeds the wages.

The minimum wage eliminates a range of mutually beneficial employment agreements from taking place. Any worker whose revenue potential to an employer falls below the prescribed wage minimum cannot be hired by that employer.

This wouldn’t be a cause for concern if every individual in society has a revenue potential which exceeds the minimum wage. However, whether we like it or not, all individuals in society are not perfect carbon copies of each other. Each has their own skills and human capital. Those whose labor is less valued or less skilled is most likely to have a revenue potential that falls short. In the absence of a minimum wage such an individual can find employment: albeit at a low wage. In the presence of the minimum wage such an individual is at the mercy of the unemployment line.

For these reasons, I advocate elimination of the market impeding minimum wage. However, I’ll remind you that in Part I, I also offered what I think may be a sensible alternative in the form of a basic income guarantee.