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Why the Minimum Wage Law Causes Unemployment
Why the Minimum Wage Law Causes Unemployment
A wage is simply a special type of price, specifically the price of labor services. The most universally accepted proposition in economics is the Law of Demand. When other things are held constant, if prices go up, buyers will buy less. Thus if labor becomes more expensive, employers will hire fewer workers. That is because some workers who would have been profitable to hire become unprofitable. A second well-accepted proposition is the Law of Supply. The higher the price suppliers receive, the more they will supply.
Putting the two laws of economics together, higher wages increase the number of workers willing to work but decrease the number of workers employers will hire. Artificially raising wages by governmental edict creates a surplus of labor, better known as unemployment. Despite the appearance of some recent studies to the contrary, a multitude of evidence has led most economists to accept this conclusion. The magnitude of the unemployment effects of minimum wage increases can be questioned, but the existence of those effects cannot.
A minimum wage has the greatest impact on those with low skills whose normal wage would be less than or near the legally established minimum. However, as minimum wages are raised secondary effects tend to increase the wages of workers who earn more. Most products can be produced in different ways. For example, crops can be harvested with stoop labor or by skilled workers using expensive machinery. As a result, unskilled labor often competes directly or indirectly with semiskilled and skilled labor. This explains why the AFL-CIO regards an increase in the minimum wage as so important, even though almost all AFL-CIO workers earn far more than the minimum. Increasing the minimum wage is organized labor's attempt to price its competition out of the market.