The Minimum Wage: An Unfair Advantage for Employers

by Donald J. Boudreaux

While Congress and the Bush Administration are squabbling over how much to raise the minimum wage, they should keep in mind that all minimum-wage legislation creates a buyers' market for unskilled labor. And as in all buyers' markets, buyers (in this case, employers) enjoy an unequal bargaining advantage over sellers (in this case, unskilled workers).

Consider, for example, a grocer. Suppose he decides that a clean parking lot will attract more customers, and that this will increase his sales by $10 per day. Of course, the grocer will pay no more than $10 a day to have his parking lot cleaned. He then investigates how best to get the job done.

Suppose there are two options available to him. One way is to hire a fairly skilled worker who can clean the parking lot in one hour, while the second way is to hire two unskilled workers who, working together, will get the job done in the same time. Other things being equal, the grocer will make his decision based upon the relative cost of skilled versus unskilled labor.

Let's assume the skilled worker will charge $6 an hour, while each of the unskilled workers will charge $2.50 an hour. In a free labor market, the grocer will hire the two unskilled workers because, in total, it costs him $5 per hour for the unskilled workers whereas it would cost $6 for the one skilled worker.

But what will the grocer do if a minimum wage of $4 per hour is imposed? To hire the two unskilled workers will now cost him a total of $8 an hour. The skilled worker now becomes the better bargain at $6 an hour. Minimum-wage legislation strips unskilled workers of their one bargaining chip: the willingness to work at a lower wage than that charged by workers with more skills. The result is unemployment of the unskilled workers.

Consider another effect of the minimum wage. Because there are more people who want jobs at the minimum wage rate than there are jobs to go around, employers have little incentive to treat unskilled workers with respect or dignity. If an employer is abusive toward an unskilled worker, the employer need not be concerned if the worker quits. After all, there are plenty of unemployed unskilled workers who can be hired to fill positions vacated by workers who quit.

In addition, the permanent buyers' market created by the minimum wage encourages employers to discriminate in their hiring and firing decisions on the basis of sex, race, religion, and so on. Suppose an employer has two minimum-wage jobs available, but there are ten unskilled workers who apply for the jobs. Because the workers are prohibited from competing with each other on the basis of wage rates, other factors must determine which of the workers will be hired. If the employer, say, has an irrational hatred of blacks, and if there are at least two non-black workers who have applied for employment, you can be sure that no black workers will be hired. With a surplus of unskilled workers, there is no economic incentive to stop this bigoted employer from indulging his prejudices.

Minimum-wage legislation creates an excess supply of unskilled labor. This gives the buyers of unskilled labor an unfair bargaining advantage over the sellers of unskilled labor. It is thus pure fantasy to believe that the welfare of unskilled workers can be improved by such legislation. Unskilled workers shouldn't be restricted to a permanent buyers' market.