Minimum Wages

Almost everyone agrees that fixing prices is a bad idea. It causes shortages or surpluses, unless it happens to be fixed exactly where demand and supply would require it to be. Prices are obviously constantly changing and central planners cannot imitate the market, which means a fixed price can be at its equilibrium level only for a very short period and only by accident.

Almost everyone has exceptions to this rule, though. In times of crisis, such as natural disaster, people are willing to give up on economic rationality and will favor price-fixing schemes in order to help people. Obviously these actions hurt those they are intended to help. When the prices of water and food rise after a devastating hurricane for example, that is a good thing. It makes it profitable to actually get the food and water where they are needed and it also restrains people from using these scarce resources in less important things. Having food and water at a higher price is better than having no food or water at all.

There are some price-fixing schemes that many favor even in normal times. Most notably some wages and interest rates(in a way interest rates are the price of renting money). Interest rates are to be decided by central banks, while (minimum) wages should be the responsibility of the people's representatives.

"'Wages aren't just prices!"

Well actually they kind of are. Wages are the price of labour, and economic theory should always consider them as such. It is of course difficult for people to grasp this simple concept, because many of us earn wages. It is easy to simply think that higher wages lead to greater prosperity, regardless of how these higher wages are achieved. After all we individually enjoy greater prosperity if our wages are raised, so why isn't this the same for society as a whole?

Wages are a function of productivity, so if wages rise because we are more productive, there's no problem. But if wages are raised due to politicial pressure, we will simply end up with the predictable outcome of a surplus in labour. That means unemployment.

If a person brings X amount of money to a company's bottom line, then obviously they would be willing to pay this person up to X amount of money in wages. Of course it's not that simple in practice, since it's hard to evaluate how much additional wealth a single person would create for the company and all kinds of other factors need to be taken into account.

But why doesn't the company pay 0,1X in wages? I mean that would mean an additional 0,9X in profits. The reason is competition: If the company pays only 0,1X, then another company might bid this labour away by offering 0,2X. Then someone offers 0,3X and so on, until equilibrium is reached. In real life wages, just like other prices, never reach their equilibrium level, but are nonetheless constantly moving towards it.

"Politics relies on ignorance."

So let's take the minimum wage. What kind of labour has the lowest productivity? Those with no education and/or practical skills and those with a high risk premium(ex-cons, recovering drug addicts etc). A minimum wage hurts precisely these people, because they can no longer be employed economically. Our interventionist friends are obviously telling us that the minimum wage would help precisely these people. They forget that even though we have a right to work, we do not have a right to a job.

Most industrialized countries have either explicit or implicit minimum wages. There aren't any economic reasons for this, so what are the political implications of a min. wage? In political entrepreneurship the first question should be cui bono: Who benefits?

Politicians obviously benefit, both directly and indirectly. Directly they benefit by gaining popularity among voters. Those hurt most by a hike in the minimum wage aren't exactly the most active voters(poor, uneducated etc) in society, so we end up with a situation where politicians make the middle class feel good about themselves while they proceed to make labour of lower productivity unemployable.

"The rich get welfare too."

If we can get a job done by hiring one skilled worker(16€/hour) or three unskilled workers(5€/hour each), then we'd obviously hire the unskilled ones. We'd end up saving 1€/hour. Suppose we have the same situation with a minimum wage of 6€/hour...

The skilled worker benefits, because the minimum wage makes it harder for unskilled labour to compete. This is why labour unions, Wal-Mart and other organizations that are in no way affected by the minimum wage champion it. They directly benefit from it. Politicians on the other hand now benefit indirectly, because these organizations go and lobby for hikes in the minimum wage.

There is an unlimited amount of work to do, so doesn't it seem weird that getting a job is so hard? Especially young people have had a ton of job opportunities die out due to the minimum wage. What about a recovering drug addict who hasn't worked in ten years? Why can't he offer his labour services at a discount? The longer you are unemployed, the less employable you become.

It must be noted that even countries with extensive welfare programs for the poor have minimum wages. If you already have guarantees against poverty in the form of wealth redistribution, why on earth would you need a minimum wage on top of that?

The minimum wage makes it illegal for some people to work at a certain wage. That's all it does. If we actually had a shortcut to prosperity, then why don't we set the minimum wage at 100€/hour? Because if those favoring the minimum wage were right, this would be the logical conclusion of their arguments.

To get an idea of what would happen, look at what the United States did to American Samoa:
http://www.youtube.com/watch?v=_LaPGIIAyk4

The minimum wage is a political tool with no ethical or economic justification. It should be completely abolished and replaced with nothing.