The Meaningless, Destructive Minimum Wage

The New York Times has just published an article on the minimum wage that is a major embarrassment to liberals/progressives. Mind you, that was clearly not the Times’ intent, but that is certainly the effect of the article. 

The article states that the federal minimum wage of $7.25 per hour has largely become meaningless. That’s because “even most teenagers are earning twice that.” 

What? That’s impossible! Haven’t liberals/progressives told us for decades that without a minimum wage, greedy, rapacious, capitalist employers would drive wages down to mere subsistence levels? 

If that’s true, then what’s up with those wages that employers are paying teenagers that are twice what the law requires them to pay? If the liberals/progressives are right, wouldn’t employers be paying teenagers $7.25 per hour or, in the absence of the minimum wage, just a few dollars per hour?

The Times writes:

Under New Hampshire law, Janette Desmond can pay the employees who scoop ice cream and cut fudge at her Portsmouth sweet shop as little as $7.25 an hour.

But with the state unemployment rate under 2 percent, the dynamics of supply and demand trump the minimum wage: At Ms. Desmond’s store, teenagers working their first summer jobs earn at least $14 an hour.

“I could take a billboard out on I-95 saying we’re hiring, $7.25 an hour,” Ms. Desmond said. “You know who would apply? Nobody. You couldn’t hire anybody at $7.25 an hour.”

So, there you have it — total embarrassment for the liberal/progressive advocates of the minimum wage. 

So, what explains this phenomenon? Is it because liberals/progressives have been wrong all these decades about the greedy, self-interested sentiments of employers? Could it be that American employers have actually been benevolent, good, caring advocates of the poor, needy, and disadvantaged? Could it be that they are paying twice the minimum wage as a voluntary donation just to help out teenagers?

Actually not. The reason that those employers are paying twice the mandated minimum is because of market conditions. Labor is scarce and demand for labor is high. And business is booming.

In other words, employers need workers, and there is not a big supply of workers. When that happens, wage rates are bid up through the competition between employers for workers. It’s the natural economic law of supply and demand that drives wages upward, not the artificial man-made law of a minimum-wage mandate.

In fact, the Times’ article actually points this out: “The red-hot labor market of the past two years has led to rapid pay increases, particularly in retail, hospitality and other low-wage industries. It has also rendered the minimum wage increasingly meaningless.”

The problem, however, is that the minimum wage is not entirely meaningless. It actually can still be very destructive. 

That’s because of the economic principle of subjective value. Even in a red-hot labor market, where wages are soaring, there exists the possibility that employers will subjectively place a value of only, say, $5 per hour on a particular worker. The $7.25 minimum wage prevents employers from hiring that worker. He is forced to remain unemployed, which means he goes on welfare or into the drug trade. The principle becomes more pronounced if the minimum wage is set higher, such as $15 per hour, as liberals/progressives advocate.

Among the best things Americans could ever do is repeal the minimum wage, not only because it has become increasingly meaningless but also because it remains potentially destructive to workers whose labor is valued in the marketplace at less than the governmentally set minimum.

Reprinted with permission from The Future of Freedom Foundation.

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