Wage Control Laws & Unintended Consequences

by Corey J. Wesley | 9:57 am, February 25, 2013 | Comments Off

In his 2013 State of the Union Address, Barack Obama proposed an increase of the federal minimum wage to $9.00 per hour. Since the president’s address pundits, politicians and voters have weighed in with varying opinions on the topic, most of which are based on feelings and emotion. In this assessment of the issue I will use a different approach to identify the unintended consequences of central planning of wage rates, and hopefully dispel any notion that wage control is beneficial to workers. 

There’s no question that most people who support a federally mandated increase in minimum wage are well intentioned. Considering the ever increasing cost of living it seems unreasonable that someone should work for $7.85 per hour. Raising minimum wage only makes sense..  or does it? There are many unintended, negative consequences that would arise from another increase in minimum wage rates. Many low-skilled workers will lose the opportunity to hold a job, overall consumer value will be decreased, and many entrepreneurs will be forced out of, or prohibited from entering the marketplace.

Contrary to what many feel-good voters want to believe, the labor of each individual has a value variance. You wouldn’t hire a lawyer for $9.00 per hour. Not only will you not find a lawyer to represent you at that rate, but I would argue that you wouldn’t want to if proving your innocence or retaining custody of your child depended upon it. Likewise you wouldn’t pay someone $200 per hour to change the oil in your car. While the convenience of having your oil changed at an auto shop is worth something, the skill required to do so is actually worth very little – almost anyone can change oil, hence the labor required to change your oil has a relatively low value. The same concept applies to the general labor market. Every individual possesses a unique set of skills, competence, experience and value, and to entrust a central government agency to identify what that is for a vast portion of America’s work force will produce negative unintended consequences.

Raising the minimum rate of wages, or setting a price floor on the labor market, will create discrimination among low-skilled workers and essentially make it illegal to hire an individual with skills worth less than $9.00 per hour. In other words wage laws prohibit employers from hiring workers whose product of labor is worth less than $9.00 per hour. This is not beneficial to young workers or workers who are unexperienced or unskilled. Remember – employers are not required to hire people; only to pay them a certain wage rate. If the law makes hiring one additional employee too costly, the employer will merely choose not to hire.

Below is a graph showing the relationship between Labor Price (P), Labor Quantity [labor hours consumed by employers] (Q), Labor Supply [number of workers willing to work] (S), and Labor Demand [hours demanded by employers] (D).

In the graph above you can see that when price (P) is increased to P2 the quantity demanded (Q0) shifts to the left [or decreases] to Q1. When a law mandates that employers increase the wages they pay employees, the result is a decreased demand in labor. In addition to decreasing the demand for labor, you can see that labor supply, or those willing to work at that price rate, increases. This can also have a negative affect on low-skilled workers trying to find a job; if the labor market becomes saturated with workers willing to enter it at the higher price, the workers already present at that price will have a more difficult time competing for a job.

In addition to the negative impact minimum wage laws have on low-skilled workers, the concept of a minimum wage law is shrouded in the idea that force and coercion is more effective than voluntary action. The important thing to keep in mind is that no individual is forced to work at any given wage rate; He can always choose to work somewhere else, negotiate a higher rate, or improve his skills to increase his labor value. In a free society no one is forced to do anything; all trade is voluntary and mutually beneficial. Government intervention in the labor market always creates market distortions, benefits some while hurting others, chooses winners and losers, and diminishes wealth creation.

In conclusion, price controls and minimum wage laws require the government’s monopoly of force to manipulate private individuals. While it may feel good to support higher wages for everyone, reality can not be ignored, and neither can the consequences. The policy that will benefit workers, employers and consumers the most is one that permits the market to dictate the price of labor.

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